Handbook on Audit of CSR Activities...In this direction, the CSR Committee of ICAI has brought out this Handbook on Audit of CSR Activities to provide detailed guidance on the auditing

Handbook on Audit of CSR Activities

The Institute of Chartered Accountants of India (Set up by an Act of Parliament)

New Delhi

© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form, or by any means, electronic

mechanical, photocopying, recording, or otherwise, without prior permission,

in writing, from the publisher.

CSR

[email protected]

www.icai.org

First Edition :

Committee/Department :

E-mail :

Website :

Price :

ISBN :

Published by : The Publication Directorate on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100,

Indraprastha Marg, New Delhi – 110 002 (India)

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra – 282 003 December | 2020 | P2758 (New)

` 150/-

Basic draft of this publication was prepared by authors CA. Pramod Jain,

CA. Charmi Shah and CA. Sonali Das Halder

978-81-947221-4-4

December, 2020

mailto:[email protected]

Foreword

According to the United Nations Industrial Development Organization,

Corporate Social Responsibility (CSR) is a management concept whereby

companies integrate social and environmental concerns in their business

operations and interactions with stakeholders. CSR is generally understood

as being the way through which a company achieves a balance of economic,

environmental and social imperatives (“Triple-Bottom- Line- Approach”),

while at the same time addressing the expectations of shareholders and

stakeholders.

In India, with the enactment of the Companies Act, 2013 by the Ministry of

Corporate Affairs, Government of India, it has now become mandatory for

Companies to take up CSR projects on social welfare activities. CSR has

played a very important role in supporting the social and economic

development of the country during the Covid-19 pandemic.

The Institute of Chartered Accountants of India (ICAI) has been extending a

helping hand in the form of publications and training programmes in the

relevant areas to its members to help them pacing up with evolving

knowledge.

In this direction, the CSR Committee of ICAI has brought out this Handbook

on Audit of CSR Activities to provide detailed guidance on the auditing

aspects of CSR spends and the roles and responsibilities of members of

ICAI. The publication will be a useful guide for the complying with auditing

requirements as per the Companies (Company Social Responsibilities

Policy) Rules, 2014.

I complement the CSR Committee Chairman CA. Pramod Jain, Vice-

Chairman CA. Charanjot Singh Nanda and all members for their valuable

inputs in bringing out this handbook and to the Committee Secretariat in

promptly releasing the same. This handbook is a laudable effort as it

attempts to provide guidance on the CSR Auditing related issues, to the

members and various other stakeholders.

CA Atul Kumar Gupta

New Delhi President

Date:

Preface

Section 135 of The Companies Act, 2013 has made it mandatory for

companies fulfilling certain criteria, to implement and report CSR policies.

Rules framed thereunder and Notifications issued from time to time, has

provided extensive guidelines on the activities to be undertaken by the

companies and the reporting of the same in the Annual Report of the

Company.

During the COVID-19 pandemic, CSR has played an even greater role with

corporates, and individuals undertaking Corporate Social Responsibility

projects over and above the minimum criteria determined by law. Corporates

have stood by the Government, during the time of crisis to strengthen the

country both socially and economically.

The ICAI has released Technical Guide on Accounting for Corporate Social

Responsibility Activities, providing guidance on the accounting aspects of

CSR expenditures. With the increasing importance of the CSR activities, it

has been felt necessary to provide guidance to the industry and

professionals on the auditing aspects of the CSR Expenditures. Requirement

of audit of CSR activities seems not to be mandatory as per Companies Act

2013. However, various provisions of the Companies (Corporate Social

Responsibility Policy) Rules 2014 require the monitoring and reporting

mechanism for CSR activities. Hence, monitoring of CSR activities and its

reporting is mandatory as per the Companies (Company Social

Responsibility Policy) Rules 2014. Also, it is the responsibility of the

Company (through CSR Committee) to monitor the funds of the Company

which are to be utilized as per the CSR Policy of the Company.

This handbook is an effort made by the CSR Committee of ICAI towards

meeting the expectations of the professionals and the stakeholders in this

respect.

I am thankful to CA. Atul Kumar Gupta, President and CA. Nihar Niranjan

Jambusaria, Vice President, ICAI, for the guidance and support in coming out

with this Handbook. I would also like to place on record my deep appreciation

for the guidance and support of the members of the CSR Committee in

publication of the Handbook. I appreciate the efforts put in by CA. Sonali Das

Halder, Secretary CSR Committee of ICAI, for her contribution and efforts in

timely releasing of the Handbook. I place on record my sincere thanks to CA.

Charmi Shah, Co-opted member of CSR Committee, for her valuable inputs

in drafting this handbook.

CA. Pramod Jain

Place: New Delhi Chairman

Date: CSR Committee

Contents

1. Introduction ....................................................................................... 1

2. Implementation of CSR Activities ....................................................... 2

3. Requirement of CSR Audit ................................................................ 4

4. Responsibility of Auditors .................................................................. 6

5. Reporting requirement under CARO 2020

relevant to CSR ................................................................................ 8

Annexures ................................................................................................. 9

1. Section 135 of the Companies Act, 2013 ........................................... 9

2. Schedule VII of the Companies Act, 2013 ........................................ 12

3. Companies (CSR Policy Rules) 2014 ............................................... 14

4. Advisory on Issuance of Utilization Certificate including the draft

Independent Practitioner’s Report on Utilization of CSR Funds. ....... 23

5. Guidance Note on Reports or Certificates for Special Purposes ...... 29

6. Guidance Note on Audit of Expenses .............................................. 86

7. Relevant portion related to CSR being Clause xx in

Guidance Note on CARO 2020 issued by ICAI ............................... 105

8. Relevant portion of the Companies (Amendment) Bill,2020 ............ 115

1

Chapter 1

Introduction

1. Section 135 of the Companies Act, 2013 (the Act), requires the Board

of Directors of every company having a net worth of Rupees 500 crore

or more, or turnover of Rupees 1,000 crore or more or a net profit of

Rupees 5 crore or more, during the immediate preceding financial

year, to constitute a Corporate Social Responsibility (CSR) Committee

of the Board.

2. The Corporate Social Responsibility Committee has to formulate and

recommend to the Board, a Corporate Social Responsibility Policy

which shall indicate the activities to be undertaken by the company in

areas or subject as specified in Schedule VII of the Act. The

Committee has also to recommend the amount of expenditure to be

incurred on the CSR activities and shall monitor the CSR policy of

such company from time to time.

3. The Board has to ensure that the company spends in every financial

year at least 2% of the average net profits of the company made

during the three immediately preceding financial years or where the

company has not completed the period of three financial years since

its incorporation, during such immediately preceding financial years,

on Corporate Social Responsibility in pursuance of its policy in this

regard.

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Chapter 2

Implementation of CSR Activities

A company may decide to undertake its CSR activities approved by the CSR

Committee with a view to discharging its CSR obligation as arising under

section 135 of the Act in the following ways:

(a) making a contribution to the funds as specified in Schedule VII to the

Companies Act; or

(b) through a registered trust or a registered society or a company

established under Section 8 of the Companies Act (or Section 25 of

the Companies Act, 1956), either singly or along with its holding or

subsidiary or associate company or along with any other company or

holding or subsidiary or associate company of such other company, or

otherwise ; or

(c) in any other way in accordance with the Companies (Corporate Social

Responsibility Policy) Rules, 2014, e.g. on its own.

Hence, mode of implementation of CSR activities could be as under:

• Directly by the company by

o Company itself undertaking the projects

o Collaborating with other companies

o Making contributions as allowed in Schedule VII of the

Companies Act 2013 like to PM Nation Relief Fund / PM

CARES Fund / Swach Bharat Kosh / Clean Ganga Fund

• Through a third party being Section 8 Company / Registered Trust/

Registered Society, which is:

o Established by the company (singly or with other company)

o Established by Central Government or State Government or any

entity established under an Act of Parliament/State

o Any entity other than above being Section 8 company /

Registered Trust/ Registered Society, wherein:

• The entity should have an established track record of three years; and


3

• The Company has to specify:-

o The projects

o Modalities of utilization of funds; and

o Monitoring and reporting mechanism

4

Chapter 3

Requirement of CSR Audit

Requirement of audit of CSR activities seems not to be mandatory as per

Companies Act 2013. However, various provisions of the Companies

(Company Social Responsibilities Policy) Rules 2014 require the monitoring

and reporting mechanism for CSR activities. These include:

S. No. Provision Requirement

1 Proviso to sub-

rule (2) of Rule 4

Provided that if, the Board of a company

decides to undertake its CSR activities

through a company established under

Section 8 of the Act or a registered trust or

a registered society, other than those

specified in this sub-rule, such company or

trust or society shall have an established

track record of three years in undertaking

similar programs or projects; and the

company has specified the projects or

programs to be undertaken, the modalities

of utilisation of funds of such projects and

programs and the monitoring and reporting

mechanism.

2 Sub-Rule (2) of

Rule 5

The CSR Committee shall institute a

transparent monitoring mechanism for

implementation of the CSR projects or

programs or activities undertaken by the

company.

3 Sub-rule (1)(b) of

Rule 6

The CSR Policy of the company shall, inter-

alia, include monitoring process of such

projects or programs.

Hence, monitoring of CSR activities and its reporting is mandatory as per the

Companies (Company Social Responsibilities Policy) Rules 2014. Also, it is

the responsibility of the Company (through CSR Committee) to monitor the

funds of the Company which are to be utilized as per the CSR Policy of the

Company.


5

Wherever, the Company is complying with its CSR obligations by merely

making contribution (donation) which is specifically allowed as per Schedule

VII of the Act, there would not be any requirement of obtaining any report of

such contribution made. However, where the CSR obligation is done through

a third party as per sub-rule (2) of Rule 4 of the CSR Policy Rules, report of

utilization of funds should be obtained from that third party’s auditors by the

Company’s CSR Committee to have an effective CSR compliance of the

monitoring and reporting requirements of the CSR Policy Rules.

6

Chapter 4

Responsibility of Auditors

Wherever a Company undertakes CSR activity itself, the auditor of the

company should ensure that:

• The activity/ project undertaken is within the purview of Schedule VII of

the Act

• If mere contribution/donation is given, then the same is specifically

allowed as per Schedule VII of the Act.

• Separate disclosure of expenditure on CSR activities is made as per

Schedule III of the Act.

• The expenditure on the project is incurred as per Companies (CSR

Policy) Rules 2014.

• The company has complied with applicable Accounting Standards in

accounting, recognition and disclosure related to CSR spend.

• He has complied with relevant Standards on Auditing for audit of CSR

spend including:

o SA 250 - Consideration of Laws and Regulations in an Audit of

Financial Statements.

o SA 720 (Revised) - The Auditor’s Responsibilities Relating to

Other Information

He has complied with the Guidance note on Audit of Expenses. Wherever a

Company undertakes CSR activity through a Third Party being eligible

Section 8 Company / Registered Trust / Registered Society, the company

should obtain an Independent Practitioner’s Report on Utilisation of such

CSR Funds from the auditor / CA in practice of the third party, to whom the

funds are given by the Company for implementing CSR activity. The auditor /

CA in practice of the third party before issuing the Independent Practitioner’s

Report on Utilization of CSR Funds should ensure that:

• The third party has spent the funds on CSR activities as per Section

135 of the Companies Act, 2013, read with Schedule VII to the Act and

related regulations.


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• Verification of the CSR spend has been done as per Guidance Note on

Audit of Expenses issued by ICAI.

• The utilization of CSR Funds report is issued in accordance with the

Guidance Note on Reports or Certificates for Special Purposes issued

by the Institute of Chartered Accountants of India.

A draft of the Independent Practitioner’s Report on Utilization of CSR Funds

is given as an annexure in this handbook

8

Chapter 5

Reporting requirement under CARO 2020 relevant to CSR

Companies (Auditor’s Report) Order (CARO) 2020 was notified on 25th

February 2020 vide S.O. S49(E), and was to be applicable for the financial

years commencing on or after the 1st April, 2019. However, the same was

extended by a year by Ministry of Corporate Affairs vide Order dated 24th

March 2020, to be applicable for the financial years commencing on or after

the 1st April, 2020.

Clause xx has been inserted in the CARO which specifically requires

reporting on CSR. The same is read as under:

“(xx) (a) whether, in respect of other than ongoing projects, the

company has transferred unspent amount to a Fund specified in

Schedule VII to the Companies Act within a period of six months of the

expiry of the financial year in compliance with second proviso to sub-

section (5) of Section 135 of the said Act;

(b) whether any amount remaining unspent under sub-section (5) of

section 135 of the Companies Act, pursuant to any ongoing project,

has been transferred to special account in compliance with the

provision of subsection (6) of Section 135 of the said Act”

The Auditor while reporting on this clause should refer and comply with the

Guidance Note on CARO 2020 issued by ICAI. Relevant portion of the same

is given as an annexure to this handbook.

9

Annexures

1. Section 135 of the Companies Act

135.(1) Every company having net worth of rupees five hundred crore or

more, or turnover of rupees one thousand crore or more or a net profit of

rupees five crore or more during the immediately preceding financial year

shall constitute a Corporate Social Responsibility Committee of the Board

consisting of three or more directors, out of which at least one director shall

be an independent director.

Provided that where a company is not required to appoint an independent

director under sub-section (4) of section 149, it shall have in its Corporate

Social Responsibility Committee two or more directors.

(2) The Board's report under sub-section (3) of section 134 shall disclose

the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,—

(a) formulate and recommend to the Board, a Corporate Social

Responsibility Policy which shall indicate the activities to be

undertaken by the company in areas or subject, specified in

Schedule VII;

(b) recommend the amount of expenditure to be incurred on the

activities referred to in clause (a); and

(c) monitor the Corporate Social Responsibility Policy of the

company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,—

(a) after taking into account the recommendations made by the

Corporate Social Responsibility Committee, approve the

Corporate Social Responsibility Policy for the company and

disclose contents of such Policy in its report and also place it on

the company's website, if any, in such manner as may be

prescribed; and

(b) ensure that the activities as are included in Corporate Social

Responsibility Policy of the company are undertaken by the

company.





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(5) The Board of every company referred to in sub-section (1), shall

ensure that the company spends, in every financial year, at least two per

cent. of the average net profits of the company made during the three

immediately preceding financial years 1[or where the company has not

completed the period of three financial years since its incorporation, during

such immediately preceding financial years], in pursuance of its Corporate

Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas

around it where it operates, for spending the amount earmarked for

Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board

shall, in its report made under clause (o) of sub-section (3) of section 134,

specify the reasons for not spending the amount 2[and, unless the unspent

amount relates to any ongoing project referred to in sub-section (6), transfer

such unspent amount to a Fund specified in Schedule VII, within a period of

six months of the expiry of the financial year].

4[Provided also that if the company spends an amount in excess of the

requirements provided under this sub-section, such company may set off

such excess amount against the requirement to spend under this sub-section

for such number of succeeding financial years and in such manner, as may

be prescribed].

Explanation.—For the purposes of this section "net profit" shall not include

such sums as may be prescribed, and shall be calculated in accordance with

the provisions of section 198.

3[(6) Any amount remaining unspent under sub-section (5), pursuant to any

ongoing project, fulfilling such conditions as may be prescribed, undertaken

by a company in persuance of its Corporate Social Responsibility Policy,

shall be transferred by the company within a period of thirty days from the

end of the financial year to a special account to be opened by the company

in that behalf for that financial year in any scheduled bank to be called the

Unspent Corporate Social Responsibility Account, and such amount shall be

spent by the company in pursuance of its obligation towards the Corporate

1 Inserted by The Companies (Amendment) Act, 2019- Yet to be Notified 2 Inserted by The Companies (Amendment) Act, 2019- Yet to be Notified 3 Inserted by The Companies (Amendment) Act, 2019- Yet to be Notified



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Social Responsibility Policy within a period of three financial years from the

date of such transfer, failing which, the company shall transfer the same to a

Fund specified in Schedule VII, within a period of thirty days from the date of

completion of the third financial year].

4[(7) If a company is in default in complying with the provisions of sub-

section (5) or sub-section (6), the company shall be liable to a penalty of

twice the amount required to be transferred by the company to the Fund

specified in Schedule VII or the Unspent Corporate Social Responsibility

Account, as the case may be, or one crore rupees, whichever is less, and

every officer of the company who is in default shall be liable to a penalty of

one-tenth of the amount required to be transferred by the company to such

Fund specified in Schedule VII, or the Unspent Corporate Social

Responsibility Account, as the case may be, or two lakh rupees, whichever is

less.

3[(8) The Central Government may give such general or special directions to

a company or class of companies as it considers necessary to ensure

compliance of provisions of this section and such company or class of

companies shall comply with such directions.

5[(9) Where the amount to be spent by a company under sub-section (5) does

not exceed fifty lakh rupees, the requirement under sub-section (1) for

constitution of the Corporate Social Responsibility Committee shall not be

applicable and the functions of such Committee provided under this section

shall, in such cases, be discharged by the Board of Directors of such

company].

4 Inserted by the Companies (Amendment) Act, 2020. Yet to be notified 5 Inserted by the Companies (Amendment) Act, 2020. Yet to be notified

12

2. Schedule VII of the Companies Act, 2013

SCHEDULE VII

Activities which may be included by companies in their Corporate Social

Responsibility Policies Activities relating to:—

1(i) Eradicating hunger, poverty and malnutrition, “promoting health care

including preventive health care” and sanitation including contribution

to the Swach Bharat Kosh set-up by the Central Government for the

promotion of sanitation] and making available safe drinking water.

(ii) promoting education, including special education and employment

enhancing vocation skills especially among children, women, elderly

and the differently abled and livelihood enhancement projects.

(iii) promoting gender equality, empowering women, setting up homes and

hostels for women and orphans; setting up old age homes, day care

centres and such other facilities for senior citizens and measures for

reducing inequalities faced by socially and economically backward

groups.

(iv) ensuring environmental sustainability, ecological balance, protection of

flora and fauna, animal welfare, agroforestry, conservation of natural

resources and maintaining quality of soil, air and water including

contribution to the Clean Ganga Fund set-up by the Central

Government for rejuvenation of river Ganga.

(v) protection of national heritage, art and culture including restoration of

buildings and sites of historical importance and works of art; setting up

public libraries; promotion and development of traditional art and

handicrafts;

(vi) measures for the benefit of armed forces veterans, war widows and

their dependents, Central Armed Police Forces (CAPF) and Central

Para Military Forces (CPMF) veterans, and their dependents including

widows;

(vii) training to promote rural sports, nationally recognised sports,

paralympic sports and olympic sports

(viii) contribution to the Prime Minister's National Relief Fund or Prime

Minister’s Citizen Assistance and Relief in Emergency Situations Fund

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(PM CARES Fund) or any other fund set up by the Central Govt. for

socio economic development and relief and welfare of the schedule

caste, tribes, other backward classes, minorities and women;

(ix) (a) Contribution to incubators or research and development projects

in the field of science, technology, engineering and medicine,

funded by the Central Government or State Government or

Public Sector Undertaking or any agency of the Central

Government or State Government; and

(b) Contributions to public funded Universities; Indian Institute of

Technology (IITs); National Laboratories and autonomous

bodies established under Department of Atomic Energy (DAE);

Department of Biotechnology (DBT); Department of Science and

Technology (DST); Department of Pharmaceuticals; Ministry of

Ayurveda, Yoga and Naturopathy, Unani, Siddha and

Homoeopathy (AYUSH); Ministry of Electronics and Information

Technology and other bodies, namely Defence Research and

Development Organisation (DRDO); Indian Council of

Agricultural Research (ICAR); Indian Council of Medical

Research (ICMR) and Council of Scientific and Industrial

Research (CSIR), engaged in conducting research in science,

technology, engineering and medicine aimed at promoting

Sustainable Development Goals (SDGs).

(x) rural development projects

(xi) slum area development.

Explanation.- For the purposes of this item, the term ‘slum area' shall

mean any area declared as such by the Central Government or any

State Government or any other competent authority under any law for

the time being in force.

(xii) disaster management, including relief, rehabilitation and reconstruction

activities.

14

3. Companies (CSR Policy Rules) 2014

RULE 1 Short Title and Commencement

(1) These rules may be called the Companies (Corporate Social

Responsibility Policy) Rules, 2014.

(2) They shall come into force on the 1st day of April, 2014.

RULE 2 Definitions

(1) In these rules, unless the context otherwise requires, -

(a) “Act” means the Companies Act, 2013;

(b) “Annexure” means the Annexure appended to these rules;

(c) “Corporate Social Responsibility (CSR)” means and includes but

is not limited to :-

(i) Projects or programs relating to activities 1[areas or

subjects] specified in Schedule VII to the Act; or

(ii) Projects or programs relating to activities undertaken by

the board of directors of a company (Board) in pursuance

of recommendations of the CSR Committee of the Board

as per declared CSR Policy of the company subject to the

condition that such policy will 2[include activities, areas or

subjects] specified in Schedule VII of the Act.

(d) “CSR Committee” means the Corporate Social Responsibility

Committee of the Board referred to in section 135 of the Act.

(e) “CSR Policy” relates to the activities to be undertaken by the 3[company in areas or subjects] specified in Schedule VII to the

Act and the expenditure thereon, excluding activities undertaken

in pursuance of normal course of business of a company;

4[Provided that any company engaged in research and

development activity of new vaccine, drugs and medical devices

in their normal course of business may undertake research and

development activity of new vaccine, drugs and medical devices

related to COVID-19 for financial years 2020-21, 2021-22 and

2022-23 subject to the conditions that-

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(i) such research and development activities shall be carried

out in collaboration with any of the institutes or

organisations mentioned in item (ix) of Schedule VII to

the Act.

(ii) details of such activity shall be disclosed separately in

the Annual Report on CSR included in the Board’s

Report.]

(f) “Net profit” means the net profit of a company as per its financial

statement prepared in accordance with the applicable provisions

of the Act, but shall not include the following, namely :-

(i). any profit arising from any overseas branch or branches

of the company, whether operated as .a separate

company or otherwise; and

(ii) any dividend received from other companies in India,

which are covered under and complying with the

provisions of section135 of the Act:

Provided that net profit in respect of a financial year for which

the relevant financial -statements were prepared in accordance

with the provisions of the Companies Act, 1956 (1 to 1956) shall

not be required to be re-calculated in accordance with the

provisions of the Act:

Provided further that in case of a foreign company covered

under these rules, net profit means the net profit of such

company as per profit and loss account prepared in terms of

clause (a) of sub-section (1) of section 381 read with section

198 of the Act.

(2) Words and expressions used and not defined in these rules but

defined in the Act shall have the same meanings respectively assigned to

them in the Act.

Amendments

1. Inserted by The Companies (Corporate Social Responsibility Policy)

Amendment Rules, 2018 Dated 19.09.2018

2. Substituted by The Companies (Corporate Social Responsibility

Policy) Amendment Rules, 2018 Dated 19.09.2018





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in sub-rule (1), in sub-clause (ii) of clause (c), for the words:

cover subjects enumerated

the following words shall be subtituted namely:-

" include activities, areas or subjects specified"



in sub-rule (1), in clause (e), for the words:

company as


"company in areas or subjects"

4. Inserted by the Companies (Corporate Social Responsibility Policy)

Amendment Rules, 2020. Dated 24.08.2020

RULE 3 Corporate Social Responsibility.

(1) Every company including its holding or subsidiary, and a foreign

company defined under clause (42) of section 2 of the Act having its branch

office or project office in India, which fulfills the criteria specified in sub-

section (I) of section 135 of the Act shall comply with the provisions of

section 135 of the Act and these rules:

Provided that net worth, turnover or net profit. of a foreign company of the

Act shall be computed in accordance with balance sheet and Profit and loss

account of such company prepared in accordance .with the provisions of

clause (a) of sub-section (1) of section 381 and section 198 of the Act

(2) Every company which ceases to be a company covered under

subsection (1) of section 135 of the Act for three consecutive financial years

shall not be required to -

(a) constitute a CSR Committee; and

(b) comply with the provisions contained in sub-section (2) to (5) of the

said section,

till such time it meets the criteria specified in sub-section (1) of section 135.



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RULE 4 CSR Activities

(1) The CSR activities shall be undertaken by the company, as per its

stated CSR Policy, as projects or programs or activities (either new or

ongoing), 5[excluding activities undertaken in pursuance of its normal course

of business].

4“(2) The Board of a company may decide to undertake its CSR activities

approved by the CSR Committee, through

(a) a company established under section 8 of the Act or a registered trust

or a registered society, established by the company, either singly or

alongwith any other company, or

(b) a company established under section 8 of the Act or a registered trust

or a registered society, established by the Central Government or

State Government or any entity established under an Act of Parliament

or a State legislature :

Provided that- if, the Board of a company decides to undertake its CSR

activities through a company established under section 8 of the Act or a

registered trust or a registered society, other than those specified in this sub-

rule, such company or trust or society shall have an established track record

of three years in undertaking similar programs or projects; and the company

has specified the projects or programs to be undertaken, the modalities of

utilisation of funds of such projects and programs and the monitoring and

reporting mechanism”.

(3) A company may also collaborate with other companies for undertaking

projects or programs or CSR activities in such a manner that the CSR

Committees of respective companies are in a position to report separately on

such projects or programs in accordance with these rules.

(4) Subject to provisions of sub-section (5) of section 135 of the Act, the

CSR projects or programs or activities undertaken in India only shall amount

to CSR Expenditure.

(5) The CSR projects or programs or activities that benefit only the

employees of the company and their families shall not be considered as CSR

activities in accordance with section 135 of the Act.

(6) Companies may build CSR capacities of their own personnel as well

as those of their Implementing agencies through Institutions with established

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18

track records of at least three financial years but such expenditure

1["including expenditure on administrative overheads,"] shall not exceed five

percent of total CSR expenditure of the company in one financial year.

(7) Contribution of any amount directly or indirectly to any political party

under section 182 of the Act, shall not be considered as CSR activity.

Amendments

1. Inserted by the Companies (Corporate Social Responsibility Policy)

Amendment Rules,2014 Dated 12th September 2014

2. Subsitituted by the Companies (Corporate Social Responsibility Policy)

Amendment Rules, 2015 Dated 19th January 2015

For the words “established by the company or its holding or subsidiary

or associate company under section 8 of the Act or otherwise”, the

words “established under section 8 of the Act by the company, either

singly or alongwith its holding or subsidiary or associate company, or

alongwith any other company or holding or subsidiary or associate

company of such other company, or otherwise” shall be substituted;

3. Subsitituted by the Companies (Corporate Social Responsibility Policy)

Amendment Rules, 2015 Dated 19th January 2015.

For the words “not established by the company or its holding or

subsidiary or associate company, it”, the words “not established by the

company, either singly or alongwith its holding or subsidiary or

associate company, or alongwith any other company or holding or

subsidiary or associate company of such other company” shall be

substituted

4. Substituted by the Companies (Corporate Social Responsibility Policy)

Amendment Rules, 2016 Dated 23rd May 2016.

In rule 4, for sub-rule (2), the following sub-rule shall be substituted,:—

“(2) The Board of a company may decide to undertake its CSR

activities approved by the CSR Committee, through

(a) a company established under section 8 of the Act or a

registered trust or a registered society, established by the

company, either singly or alongwith any other company, or

(b) a company established under section 8 of the Act or a




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19

registered trust or a registered society, established by the

Central Government or State Government or any entity

established under an Act of Parliament or a State legislature :

Provided that- if, the Board of a company decides to undertake its

CSR activities through a company established under section 8 of the

Act or a registered trust or a registered society, other than those

specified in this sub-rule, such company or trust or society shall have

an established track record of three years in undertaking similar

programs or projects; and the company has specified the projects or

programs to be undertaken, the modalities of utilisation of funds of

such projects and programs and the monitoring and reporting

mechanism”.

5. Omitted by the Companies (Corporate Social Responsibility Policy)


RULE 5 CSR Committees.

(1) The companies mentioned in the rule 3 shall constitute CSR

Committee as under.-

(i) 1[a company] covered under subsection (1) of section 135 which is not

required to appoint an independent director pursuant to sub-section (4)

of section 149 of the Act, shall have its CSR Committee without such

director ;

(ii) a private company having only two directors on its Board shall

constitute its CSR Committee with two such directors;

(iii) with respect to a foreign company covered under these rules, the CSR

Committee shall comprise of at least two persons of which one person

shall be as specified under clause (d) of sub-section (1) of section 380

of the Act and another person shall be nominated by the foreign

company.

(2) The CSR Committee shall institute a transparent monitoring

mechanism for implementation of the CSR projects or programs or activities

undertaken by the company.

Amendments



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20

in clause (i) of sub rule (1), for the words:-

an unlisted public company or a private company

the following words shall be substituted namely

"a company"

RULE 6 CSR Policy

(1) The CSR Policy of the company shall, inter-alia, include the following

namely :-

(a) a list of CSR projects or programs which a company plans to

undertake 1[areas or subjects specified in] of the Schedule VII of the

Act, specifying modalities of execution of such project or programs and

implementation schedules for the same; and

(b) monitoring process of such projects or programs:

3[Provided that the CSR activities does not include the activities undertaken

in pursuance of normal course of business of a company.]

Provided 3[further] that the Board of Directors shall ensure that activities

included by a company in its Corporate Social Responsibility Policy are

related to the 2[areas or subjects specified in Schedule VII] of the Act.

(2) The CSR Policy of the company shall specify that the surplus arising

out of the CSR projects or programs or activities shall not form part of the

business profit of a company.

Amendments

1 Substituted by The Companies (Corporate Social Responsibility

Policy) Amendment Rules, 2018 Dated 19.09.2018 in sub-rule (1), in

clause (a), for the words

falling within the purview of


"areas or subjects specified in"



in sub-rule (1), in second proviso to clause (b),for the words









21

activities included in Schedule VII


"areas or subjects specified in Schedule VII"

2. Omitted by the Companies (Corporate Social Responsibility Policy)


RULE 7 CSR Expenditure

CSR expenditure shall include all expenditure including contribution to

corpus, or on projects or programs relating to CSR activities approved by the

Board on the recommendation of its CSR Committee, but does not include

any expenditure on an item not in conformity or not in line with activities

which fall within the 1[areas or subjects, specified in] Schedule VII of the Act.

Amendments



in rule 7, for the words

purview of

the following words shall be substituted namely:

"areas or subjects, specified in"

RULE 8 CSR Reporting

(1) The Board’s Report of a company covered under these rules

pertaining to a financial year commencing on or after the 1st day of April,

2014 shall include an annual report on CSR containing particulars specified

in Annexure.

(2) In case of a foreign company, the balance sheet filed under sub-clause

(b) of sub-section (1) of section 381 shall contain an Annexure regarding

report on CSR.

Notes

1. Circular relating to Extension of Tenure of High Level Committee or

Corporate Social Responsibility 2018 dated 8th March 2019

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22

RULE 9 Display of CSR Activities on its Website

The Board of Directors of the company shall, after taking into account the

recommendations of CSR Committee, approve the CSR Policy for the

company and disclose contents of such policy in its report and the same shall

be displayed on the company’s website, if any, as per the particulars

specified in the Annexure.

23

4. Advisory on Issuance of Utilization Certificate including the draft Independent Practitioner’s Report on Utilization of CSR Funds.

ADVISORY

Advisory for Members of the Institute of Chartered Accountants of India

(ICAI) and Companies to whom CSR provisions under Companies Act, 2013

apply.

Wherever a Company is required to comply with CSR Regulations under

Section 135 of the Companies Act, 2013, it may undertake the CSR activity,

either:

• By the Company itself; or

• Through a Third Party being a Trust / Society or Section 8 Company /

NGO

Wherever the company undertakes the CSR activity through a third party /

NGO, it is advised that all such companies should obtain an Independent

Practitioner’s Report on Utilisation of such CSR Funds from the auditor / CA

in practice of the third party / NGO, to whom the funds are given by the

Company for implementing CSR activity.

In such cases the auditor / CA in practice of the third party / NGO is advised

that they should submit the Independent Practitioner’s Report on Utilization

of CSR Funds after verifying that the third party has spent the funds on CSR

activities as per Section 135 of the Companies Act, 2013, read with Schedule

VII to the Act and related regulations in accordance with the Guidance Note

on Reports or Certificates for Special Purposes issued by the Institute of

Chartered Accountants of India.

The draft format of Independent Practitioner’s Report on Utilization of CSR

Funds is attached.

Thanking you,

Chairman,

CSR Committee, ICAI

Encl: Draft format of Independent Practitioner’s Report on Utilization of CSR

Funds

Note: The format of the Utilization Report is being issued after being duly

vetted by the Auditing and Assurance Standards Board of ICAI

——————————

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24

Draft format of Independent Practitioner’s Report on Utilization of CSR Funds

To

The Governing Body of the Entity (Third Party) (Address of the Entity)

Independent Practitioner’s Report on Utilization of Funds by (Name of the

third party/ NGO) for purposes of discharging the Corporate Social

Responsibility requirements of (Name of the Company)

1. This Report is issued in accordance with the terms of our engagement

letter dated (date).

2. The accompanying Statement contains the details of utilization of

funds received from (name of the company from whom CSR amount has

been received hereinafter referred as “the Company”) by (name of the entity

who received the amount hereinafter referred as “the entity”) under XX

Project (name of the Project under which the amount was received and

hereinafter referred as “the Project”) having its office at (address of the

entity) for CSR activities pursuant to the requirements of spending on CSR

activities by the Company as per Section 135 of the Companies Act 2013

(hereinafter referred as the Act) read with Schedule VII to the Act and has

been initialled by us for identification purposes.

Management’s Responsibility

3. The management of the entity is responsible for preparation of the

accompanying Statement including the preparation and maintenance of all

accounting and other relevant supporting records and documents. This

responsibility includes the design, implementation and maintenance of

internal control relevant to the preparation and presentation of the Statement

and applying an appropriate basis of preparation; and making estimates that

are reasonable in the circumstances.

4. The management is also responsible for ensuring that the [Project of]

entity complies with the requirements specified by the Company at the time

of providing the funds regarding end utilisation to meet the CSR

requirements of the company and for providing all relevant information to the

Company as agreed to between the Company and the entity spending on the

Project on the activities specified in Schedule VII to the Act.

Practitioner’s Responsibility


25

5. Pursuant to the requirements of the “Advisory issued by the CSR

Committee of ICAI” on Issue of CSR Utilization Report by Auditors of Third

Party”, it is our responsibility to provide reasonable assurance in the form of

an opinion on the Statement based on our examination of the matters in the

Statement with reference to the books of account and other records of the

[Project of] entity, whether the details given in the Statement have been

accurately extracted from the [audited / unaudited] financial statements of the

[Project of] entity produced before us for examination and the activities for

which amount was utilized by the [Project of] entity are covered under CSR

activities as per Schedule VII to the Companies Act, 2013. We have

performed following procedures in this regard 1:

(a) Traced and agreed the amounts in the attached Statement, to the

[audited / unaudited] financial statements of the entity as at and for the

year ended March 31, 20xx.

(b) Checked whether the entity has incurred amounts on the Corporate

Social Responsibility (CSR) activities specified in Schedule VII of the

Companies Act, 2013.

(c) Traced the amount spent on CSR activities from the bank statements /

cash book of the entity.

(d) Checked whether amounts spent on CSR activities have been

adequately disclosed in the financial statements of the [Project of] the

entity.

(e) Obtained written representation from the management of the entity on

the total amount unspent and their plan to disburse the unspent

amount related to the project.

(f) Tested the arithmetical and clerical accuracy of the Statement.

6. We audited the financial statements of the [Project] of the entity as of

and for the financial year ended March 31, 20XX, on which we issued an

unmodified audit opinion vide our reports dated ………………… (specify

date). Our audits of these financial statements were conducted in

accordance with the Standards on Auditing and other applicable authoritative

pronouncements issued by the Institute of Chartered Accountants of India.

Those Standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of

material misstatement2.


26

7. We conducted our examination of the Statement in accordance with

the Guidance Note on Reports or Certificates for Special Purposes issued by

the Institute of Chartered Accountants of India. The Guidance Note requires

that we comply with the ethical requirements of the Code of Ethics issued by

the Institute of Chartered Accountants of India.

8. We have complied with the relevant applicable requirements of the

Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform

Audits and Reviews of Historical Financial Information, and Other Assurance

and Related Services Engagements.

Opinion3

9. Based on our examination as above, and the information and

explanations given to us, in our opinion, the details given in the Statement

have been accurately extracted from the audited financial statements of the

[Project of] of the entity for the year ended [March 31, 20XX] produced

before us for examination. We are also of the opinion that the activities for

which amount was utilized by the [Project of] entity are covered under CSR

activities as per Schedule VII to the Act.

OR

Conclusion3

Based on our examination as above, and the information and explanations

given to us, nothing has come to our attention that causes us to believe that

the details given in the Statement have not been accurately extracted from

the unaudited financial statement of the [Project of] of the entity for the year

ended [March 31, 20XX] produced before us for examination or The activities

for which amount was utilized by the [Project of] entity are not covered under

CSR activities as per Schedule VII to the Act.

Restriction on Use

10. This report is addressed to and provided to the governing body of the

entity for the purpose of certifying the utilization of the funds by the [Project

of] entity for CSR activities as envisaged by the CSR Committee of the

Company, and should not be used by any other person or for any other

purpose. Accordingly, we do not accept or assume any liability or any duty of

care for any other purpose or to any other person to whom this report is


27

shown or into whose hands it may come without our prior consent in writing.

For XYZ and Co.

Chartered Accountants

Firm’s Registration Number

Signature

(Name of the Member Signing the Assurance Report)

(Designation)

Membership Number

UDIN

Place of Signature:-

Date:-

Statement

Details of amount received from (name of the company from whom CSR

amount has been received) by (name of the entity who received the amount)

and its utilization up to 31st March 20XX is as under:

S. No. Particulars Amount

(in Rs.)

Amount

(in Rs.)

1. Amount brought forward from financial

year 20XX-XX (opening balance as

at………. )

Out of which

Amount brought forward from previous

financial years from (name of the

company from whom CSR amount has

been received) (give dates of receipts

with year)

………. ……..

2. Add: Amount Received From (name of

the company from whom CSR amount

has been received) during the financial

year (give dates of the receipt)

……….

………


28

Less: Program Management Fees @

XX%

(………)

3. Less: Amount Spent (detail of amount

spent project wise ) during the financial

year (Give no. of clause of schedule VII

against each amount)

i. Material expenditure (nature of spend

for every material expenditure)

ii. Travel and conveyance

iii. Resource cost

iv. Printing & Stationery

v. Communication cost

Monitoring Cost

(……….)

4. Balance amount carried forward to

financial year 20XX-XX (Next year)

(Closing Balance as at…………….. )

………

It may also include:

1. Title of the project / program

2. Project duration

3. Sanctioned Budget outlay of the project by Company and total money

received till date

4. Total amount available for expenditure

5. Actual expenditure excluding commitments and advance, if any

6. If money is given as corpus then whether spend or lying idle with the

implementing agency

For

ABC Company Limited

Authorized Signatory

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29

5. Guidance Note on Reports or Certificates for Special Purposes

Guidance Note on Reports or Certificates for Special Purposes

(Revised 2016)

CONTENTS

Paragraph No.

Introduction 1-8

Scope 9-11

Objectives 12-14

Conduct of an Assurance Engagement in Accordance

with Guidance Note

15

Inability to Achieve an Objective 16

Ethical and Quality Control Requirements 17

Engagement Continuance Acceptance and 18-20

Preconditions Engagement for the Assurance 21-22

Limitation on Scope Prior to Acceptance of the

Engagement

23

Agreeing on Engagement the Terms of the 24-27

Acceptance of a Change in the Terms of the

Engagement

28

Assurance Report Prescribed by Law or Regulation 29-33

Professional Skepticism, Professional Judgment and

Assurance Skills and Techniques

34-36

Planning 37-40

Materiality 41-50

Understanding the Underlying Subject Matter and Other

Engagement Circumstances

51-53

Obtaining Evidence 54-57

Work Expert Performed by a Practitioner’s 58

Work Performed by Another Practitioner, a Responsible

Party’s or Measurer’s or Evaluator’s Expert or an

59-61


30

Internal Auditor

Written Representations 62-66

Subsequent Events 67

Other Information 68

Description of Applicable Criteria 69-70

Forming the Assurance Opinion/Conclusion 71-74

Preparing the Assurance Report 75-79

Assurance Report Content 80

Reference to the Practitioner’s Expert in the Assurance

Report

81

Assurance Report Prescribed by Law or Regulation 82

Unmodified and Modified Opinions/Conclusions 83-90

Other Communication Responsibilities 91

Documentation 92-97

Appendices

Appendix 1: Glossary of Terms Used in the Guidance

Note

Introduction

1. The purpose of this Guidance Note is to provide guidance on

engagements which require a ‘professional accountant in public practice’

(hitherto known as “practitioner”)1 to issue reports other than those which are

issued in audits or reviews of historical financial information2. The reports

which are issued pursuant to audits or reviews of historical financial

information are dealt with in Standards on Auditing (SAs) and Standards on

Review Engagements (SREs), respectively, issued by the Institute of

Chartered Accountants of India (ICAI).

2. In some cases, Government and other authorities under various

statutes or notifications require reports or certificates from practitioners in

1 The term “Professional accountant in public practice” has the same meaning as

given in the Framework for Assurance Engagements, issued by the Institute of

Chartered Accountants of India in 2007. 2 For meaning of the term “Historical Financial Information”, refer the Glossary of

Terms given in the Appendix 1 to the Guidance Note.


31

support of statements or other information provided by an entity. Such

reports or certificates can also be required to be issued to fulfill a contractual

reporting obligation or may be required by the management or those charged

with governance of an entity for its own special purposes.

3. Sometimes, the applicable law and regulation or a contractual

arrangement that an entity might have entered into, prescribe the wording of

report or certificates. The wording often requires the use of word or phrase

like “certify” or “true and correct” to indicate absolute level of assurance

expected to be provided by the practitioner on the subject matter. Absolute

assurance indicates that a practitioner has performed procedures as

considered appropriate to reduce the engagement risk3 to zero.

4. A practitioner is expected to provide either a reasonable assurance

(about whether the subject matter of examination is materially misstated) or a

limited assurance (stating that nothing has come to the practitioner’s

attention that causes the practitioner to believe that the subject matter is

materially misstated). A practitioner is not expected to reduce the

engagement risk to zero. This is because there are inherent limitations

attached to the procedures which a practitioner may perform in relation to

issuance of a report or certificate, as the case may be. The inherent

limitations arise from:

(a) the nature of financial reporting;

(b) the use of selective testing;

(c) the inherent limitations of internal controls;

(d) the fact that much of the evidence4 available to the practitioner is

persuasive rather than conclusive;

(e) the nature of procedures to be performed in a specific situation;

(f) the use of professional judgment5 in gathering and evaluating evidence

and forming conclusions based on that evidence;

3 For meaning of the term “Engagement Risk”, refer the Glossary of Terms given in

the Appendix 1 to the Guidance Note. 4 For meaning of the term “Evidence”, refer the Glossary of Terms given in the

Appendix 1 to the Guidance Note. 5 For meaning of the term “Professional Judgment”, refer the Glossary of Terms

given in the Appendix 1 to the Guidance Note.


32

(g) in some cases, the characteristics of the underlying subject matter6

when evaluated or measured against the criteria7; and

(h) the need for the engagement to be conducted within a reasonable

period of time and at a reasonable cost.

5. In view of the above, depending upon the nature, timing and extent of

procedures that can be performed based upon the facts and circumstances

of the case, a report or certificate issued by a practitioner can provide either

reasonable or limited level of assurance. Therefore, whenever a practitioner

is required to give a “certificate” or a “report” for special purpose, the

practitioner needs to undertake a careful evaluation of the scope of the

engagement, i.e., whether the practitioner would be able to provide

reasonable assurance or limited assurance on the subject matter.

6. The word ‘certificate’ as described in the laws and regulations or even

in the contracts that an entity might have entered into can normally be

associated with reasonable assurance. However, depending upon the

circumstances and based upon the nature, timing and extent of the

procedures which a practitioner can perform, the practitioner can conclude

that a reasonable assurance cannot be expressed on the subject matter of

the “certificate” and only limited assurance conclusion can be given. The

practitioner’s procedures in case where reasonable assurance is to be

expressed would be substantially different (and more extensive) from

circumstances where limited assurance is to be expressed. The Guidance

Note, at relevant places, lists the different procedures to be performed in a

reasonable assurance engagement vis a vis limited assurance engagement.

Accordingly, for the purpose of this Guidance Note, the terms, “report” /

“certificate” indicates an “assurance report” issued in compliance with this

Guidance Note.

7. Assurance engagements include both assertion based engagements8,

in which a party other than the practitioner measures or evaluates the

6 For meaning of the term “Underlying Subject Matter”, refer the Glossary of Terms

given in the Appendix 1 to the Guidance Note. 7 For meaning of the term “Criteria”, refer the Glossary of Terms given in the

Appendix 1 to the Guidance Note.

8 For meaning of the term “Assertion based Engagements”, refer the Glossary of



33

underlying subject matter against the criteria, and direct reporting

engagements9, in which the practitioner measures or evaluates the

underlying subject matter against the criteria. To be meaningful, the level of

assurance obtained by the practitioner is likely to enhance the intended

users’10 confidence about the subject matter information11 to a degree that is

clearly more than inconsequential.

8. The Guidance Note should be read in the context of the Framework for

Assurance Engagements, issued by the Institute of Chartered Accountants of

India (ICAI). Appendix 1 to the Guidance Note contains a glossary of certain

important terms used in the Guidance Note and is an integral part of the

Guidance Note. Further, for the purposes of this Guidance Note, reference to

“appropriate party(ies)” should be read hereafter as “the responsible party12,

the measurer13 or the evaluator14, or the engaging party15, as appropriate.”

Scope

9. This Guidance Note covers assurance engagements16 other than

audits or reviews of historical financial information, as described in the

Framework for Assurance Engagements (Assurance Framework) issued by

the ICAI. This Guidance Note does not apply to assurance engagements for

which subject specific Standards on Assurance Engagements have been

issued by the ICAI.

10. Not all engagements performed by the practitioners are assurance

9 For meaning of the term “Direct Reporting Engagements”, refer the Glossary of

Terms given in the Appendix 1 to the Guidance Note. 10 For meaning of the term “Intended Users”, refer the Glossary of Terms given in

the Appendix 1 to the Guidance Note. 11 For meaning of the term “Subject Matter Information”, refer the Glossary of Terms

given in the Appendix 1 to the Guidance Note. 12 For meaning of the term “Responsible Party”, refer the Glossary of Terms given in

the Appendix 1 to the Guidance Note. 13 For meaning of the term “Measurer”, refer the Glossary of Terms given in the

Appendix 1 to the Guidance Note. 14 For meaning of the term “Evaluator”, refer the Glossary of Terms given in the

Appendix 1 to the Guidance Note. 15 For meaning of the term “Engaging Party”, refer the Glossary of Terms given in

the Appendix 1 to the Guidance Note. 16 For meaning of the term “Assurance Engagements”, refer the Glossary of Terms

given in the Appendix 1 to this Guidance Note.


34

engagements. Some frequently performed engagements that are not

assurance engagements, and therefore not covered by the Guidance Note,

include:

(a) Engagements covered by Standards on Related Services (SRS), such

as agreed-upon procedures and compilation engagements;

(b) The preparation of tax returns where no assurance opinion/conclusion

is expressed; and

(c) Consulting (or advisory) engagements, such as management and tax

consulting.

11. This Guidance Note can also be applied on the reports or certificates

related to historical non-financial information that a practitioner may be called

upon to issue from time to time. ICAI, from time to time, issues specific

Guidance Notes to provide guidance on certain assurance engagements.

While complying with the requirements of those specific Guidance Notes, a

practitioner may also draw guidance from the principles enunciated in this

Guidance Note.

Objectives

12. In conducting an assurance engagement, the objectives of the

practitioner are:

(a) To obtain either reasonable assurance17 or limited assurance18, as

appropriate, about whether the subject matter information is free from

material misstatement19;

(b) To express an opinion (in a reasonable assurance engagement)/a

conclusion (in a limited assurance engagement) regarding the

outcome of the measurement or evaluation of the underlying subject

matter through a written report. The report also describes the basis for

the conclusion;

(c) Where the subject matter information is made up of a number of

17 For meaning of the term “Reasonable Assurance Engagement”, refer the Glossary

of Terms given in the Appendix 1 to the Guidance Note. 18 For meaning of the term “Limited Assurance Engagement”, refer the Glossary of

Terms given in the Appendix 1 to the Guidance Note. 19 For meaning of the term “Misstatement”, refer the Glossary of Terms given in the

Appendix 1 to the Guidance Note.


35

aspects, separate opinion/conclusion may be provided on each aspect.

All such separate opinions/conclusions do not need to relate to the

same level of assurance. Rather, each opinion/conclusion is

expressed in the form that is appropriate to either a reasonable

assurance engagement or a limited assurance engagement.

References in this Guidance Note to the opinion/conclusion in the

assurance report include each Opinion/conclusion when separate

opinions/conclusions are provided;

(d) To communicate further as required by this Guidance Note.

13. In all cases when reasonable assurance or limited assurance, as

appropriate, cannot be obtained and a qualified opinion/conclusion in the

practitioner’s assurance report is insufficient in the circumstances for the

purposes of reporting to the intended users, this Guidance Note requires that

the practitioner disclaim an opinion / a conclusion or withdraw (or resign)

from the engagement, where withdrawal is possible under applicable law or

regulation.

14. The roles played by the responsible party, the measurer or evaluator,

and the engaging party can vary. The management and governance

structures vary by jurisdiction and by entity, reflecting influences such as

different cultural and legal backgrounds, and size and ownership

characteristics. Such diversity means that it is not possible for the Guidance

Note to specify for all engagements, the person(s) with whom the practitioner

is to inquire of, request representations from, or otherwise communicate with

in all circumstances. In some cases, for example, when the appropriate

party(ies) is(are) only part of a complete legal entity, identifying the

appropriate management personnel or those charged with governance with

whom to communicate, will require the exercise of professional judgment to

determine which person(s) have the appropriate responsibilities for, and

knowledge of, the matters concerned.

Conduct of an Assurance Engagement in Accordance with Guidance Note

15. The Guidance Note aims to bring out the procedural differences

between a limited assurance engagement vis a vis a reasonable assurance

engagement. In this Guidance Note, guidance that applies to only limited

assurance or reasonable assurance engagements have been presented in a

columnar format with the letter “L” (limited assurance) or “R” (reasonable


36

assurance) after the paragraph number. Although some procedures are

required only for reasonable assurance engagements, these may

nonetheless be appropriate in some limited assurance engagements.

Inability to Achieve an Objective

16. If any of the objectives enumerated in this Guidance Note (refer

paragraphs 12 to 14) cannot be achieved, the practitioner should evaluate

whether this requires the practitioner to modify the practitioner’s

opinion/conclusion or withdraw from the engagement (where withdrawal is

possible under applicable law or regulation). In case the practitioner is

unable to achieve an objective, it represents a significant matter requiring

documentation in accordance with paragraph 92 of this Guidance Note.

Ethical and Quality Control Requirements

17. A practitioner who performs assurance engagements covered under

this Guidance Note is governed by the same ethical and quality control

requirements as are described in paragraphs 4 and 5 of the Framework for

Assurance Engagements.

Engagement Acceptance and Continuance

18. The practitioner needs to be satisfied that appropriate procedures

regarding the acceptance and continuance of client relationships and

assurance engagements have been followed, and should determine that

conclusions reached in this regard are appropriate.

19. The practitioner should accept or continue an assurance engagement

only when:

(a) The practitioner has no reason to believe that relevant ethical

requirements, including independence, will not be satisfied;

(b) The practitioner is satisfied that those persons who are to perform the

engagement collectively (the engagement team)20 have the

appropriate competence and capabilities; and

(c) The basis upon which the engagement is to be performed has been

agreed, through:

20 For meaning of the term “Engagement Team”, refer the Glossary of Terms given

in the Appendix 1 to the Guidance Note.


37

(i) Establishing that the preconditions for an assurance

engagement are present (see also paragraphs 21-22); and

(ii) Confirming that there is a common understanding between the

practitioner and the engaging party of the terms of the

engagement, including the practitioner’s reporting

responsibilities.

20. If the practitioner obtains information that would have caused the

practitioner to decline the engagement had that information been available

earlier, the practitioner should take necessary action promptly. In case of a

firm21, the practitioner (i.e., the engagement partner22)23 should communicate

that information promptly to the firm, so that the firm and the engagement

partner can take the necessary action.

Preconditions for the Assurance Engagement

21. In order to establish whether the preconditions for an assurance

engagement are present, the practitioner should, on the basis of a

preliminary knowledge of the engagement circumstances24 and discussion

with the appropriate party(ies), determine whether:

(a) The roles and responsibilities of the appropriate parties are suitable in

the circumstances; and

(b) The engagement exhibits all of the following characteristics:

(i) The underlying subject matter is appropriate;

(ii) The criteria that the practitioner expects to be applied in the

preparation of the subject matter information are suitable for the

engagement circumstances, including that these exhibit the

following characteristics as described in paragraph 35 of the

Framework for Assurance Engagements:

21 For meaning of the term “Firm”, refer the Glossary of Terms given in the Appendix

1 to the Guidance Note. 22 For meaning of the term “Engagement Partner”, refer the Glossary of Terms given

in the Appendix 1 to the Guidance Note. 23 In the context of a firm, the term practitioner would imply reference to the

engagement partner. 24 For meaning of the term “Engagement Circumstances”, refer the Glossary of



38

(a) Relevance.

(b) Completeness.

(c) Reliability.

(d) Neutrality.

(e) Understandability.

(iii) The criteria that the practitioner expects to be applied in the

preparation of the subject matter information will be available to

the intended users25.

(iv) The practitioner expects to be able to obtain the evidence

needed to support the member’s conclusion;

(v) The practitioner’s opinion/conclusion, in the form appropriate to

either a reasonable assurance engagement or a limited

assurance engagement, is to be contained in a written report;

and

(vi) A rational purpose including, in the case of a limited assurance

engagement, that the practitioner expects to be able to obtain a

meaningful level of assurance.

22. If the preconditions for an assurance engagement are not present, the

practitioner should discuss the matter with the engaging party. If changes

cannot be made to meet the preconditions, the practitioner would be well

advised not to accept the engagement as an assurance engagement, unless

required by law or regulation to do so.

Limitation on Scope Prior to Acceptance of the Engagement

23. If the engaging party imposes a limitation on the scope of the

practitioner’s work in the terms of a proposed assurance engagement, such

that the practitioner believes the limitation will result in the practitioner

disclaiming an opinion / a conclusion on the subject matter information, the

practitioner should not accept such an engagement as an assurance

engagement, unless required by law or regulation to do so.

Agreeing on the Terms of the Engagement

24. The practitioner should agree the terms of the engagement with the

25 Refer Para 37 of the Framework for Assurance Engagements.


39

engaging party. The agreed terms of the engagement should be specified in

sufficient detail in an engagement letter or other suitable form of written

agreement, written confirmation, or in law or regulation. It is in the interests

of both, the engaging party and the practitioner, that the practitioner

communicates in writing the agreed terms of the engagement before the

commencement of the engagement to help avoid misunderstandings. The

terms of engagement, at a minimum, should include the following:

(a) the objective and scope of engagement;

(b) the responsibilities of the practitioner;

(c) the responsibilities of engaging party;

(d) the responsibilities of the responsible party (if different from the

engaging party);

(e) identification of the suitable criteria to be used;

(f) identification of the subject matter including reference to the law or

regulation or the contracts;

(g) Unrestricted access to whatever records, documentation and other

information requested in connection with the engagement;

(h) The fact that the engagement cannot be relied upon to disclose errors,

illegal acts or other irregularities, for example, fraud or defalcations

that may exist;

(i) Reference to the expected form and content of report to be issued by

the practitioner; and

(j) A statement that there may be circumstances in which a report may

differ from its expected form and content.

25. The agreed terms of engagement can also include other general terms

of engagement so long as those terms are not inconsistent with the

applicable laws and regulations.

26. The form and content of the written agreement or contract will vary

with the engagement circumstances. For example, if law or regulation

prescribes in sufficient detail the terms of the engagement, the practitioner

need not record them in a written agreement, except for the fact that such

law or regulation applies and that the appropriate party acknowledges and

understands its responsibilities under such law or regulation. Law or


40

regulation, particularly in the public sector, may mandate the appointment of

a practitioner and set out specific powers, such as the power to access

appropriate party(ies)’s records and other information, and responsibilities,

such as requiring the practitioner to report directly to an authority, the

legislature or the public, in case appropriate party(ies) attempt to limit the

scope of the engagement.

27. On recurring engagements, the practitioner should assess whether the

circumstances require the terms of the engagement to be revised and

whether there is a need to remind the engaging party of the existing terms of

the engagement.

Acceptance of a Change in the Terms of the Engagement

28. The practitioner should not agree to a change in the terms of the

engagement where there is no reasonable justification for doing so. If such a

change is made, the practitioner should not

disregard evidence that was obtained prior to the change. A change in

circumstances that affects the intended users’ requirements, or a

misunderstanding concerning the nature of the engagement, may justify a

request for a change in the engagement, for example, from an assurance

engagement to a non-assurance engagement, or from a reasonable

assurance engagement to a limited assurance engagement. An inability to

obtain sufficient appropriate evidence to form a reasonable assurance

opinion/conclusion is not an acceptable reason to change from a reasonable

assurance engagement to a limited assurance engagement.

Assurance Report Prescribed by Law or Regulation

29. In some cases, law or regulation prescribes the layout or wording of

the assurance report. In these circumstances, the practitioner would need to

evaluate:

(a) Whether intended users might misunderstand the assurance

conclusion; and

(b) If so, whether additional explanation in the assurance report can

mitigate possible misunderstanding.

30. If the practitioner concludes that additional explanation in the

assurance report cannot mitigate possible misunderstanding, as the law or

regulation does not allow the practitioner to provide such additional


41

explanation in the assurance report to mitigate the risk of users

misunderstanding of the assurance conclusion, the practitioner should not

accept the engagement, unless required by law or regulation to do so.

31. In case the practitioner is required to issue an assurance report under

the applicable laws or regulations, the practitioner should discuss the matter

with the engaging party. The practitioner should provide a draft of the

assurance report to be issued that duly incorporates the essential elements

thereof as prescribed in paragraph 80 of the Guidance Note to the layout or

the wordings so prescribed. Both, the practitioner and the engaging party,

should agree on the resulting modifications to the layout or wording

prescribed under the laws or regulations. The agreement on layout or

wording of the assurance report should be duly documented in the

engagement letter. The practitioner should then accept and perform the

engagement and issue the final assurance report duly incorporating therein

the essential elements prescribed in the Guidance Note. If the engaging

party does not agree to this approach, the practitioner should consider

whether it would be appropriate to accept the engagement.

32. It may also happen that the concerned authorities reject the aforesaid

assurance report issued by the practitioner on account of the modifications

made to the prescribed layout or wording. In such circumstances, the

practitioner should obtain the evidence of rejection of the assurance report

by the concerned authorities and make it a part of the engagement

documentation. The practitioner, in such a case, may issue the assurance

report in the format prescribed under the law or regulation since the

practitioner would have complied with the requirements of this Guidance

Note while issuing the certificate in the first instance. The practitioner can

also consider enclosing a statement containing essential elements of an

assurance report as prescribed in paragraph 80 of this Guidance Note to the

format prescribed under the law or regulation. The enclosure should also

state the fact that a report issued earlier in accordance with this Guidance

Note had been rejected by the concerned authorities.

32A. It is recognised that rejections of assurance reports or certificates

issued might have also occurred in the past or there could be a situation

where the concerned regulator has expressly indicated that any modification

to the layout or the wording of the format is not acceptable and if time period

available to follow the process in paragraphs 31 and 32 is not sufficient, the

practitioner may issue the assurance report in the format prescribed under


42

the law or regulation. If the practitioner has complied with all the

requirements of this Guidance Note, the practitioner should also enclose a

statement containing essential elements of an assurance report as

prescribed in paragraph 80 of this Guidance Note, to the format prescribed

under the law or regulation by giving suitable reference of the statement in

the format. (e.g. “in terms of our statement of even date” or “to be read with

the enclosed statement of even date” etc.)

33. Similarly, the practitioner may conclude, that even where permitted by

the law/regulation or it is otherwise accepted by the concerned regulatory

bodies to provide additional information/ explanation in the assurance report,

doing the same will not mitigate the risk of users’ misunderstanding of the

assurance conclusion expressed. In such circumstance, the practitioner

should mention the circumstances not allowing the practitioner to bring down

the risk of users’ misunderstanding in the report being issued by the

practitioner. The practitioner should also include such matters in the scope of

work documented in the engagement letter.

Professional Skepticism26, Professional Judgment, and Assurance Skills and Techniques

34. The practitioner would need to plan and perform an engagement with

professional skepticism, recognizing that circumstances may exist that may

cause the subject matter information to be materiality misstated.

35. The practitioner needs to exercise professional judgment in planning

and performing an assurance engagement, including determining the nature,

timing and extent of procedures.

36. The practitioner should also apply assurance skills and techniques27 as

part of an iterative, systematic engagement process.

Planning

37. The practitioner should plan the engagement so that it will be

performed in an effective manner, including setting the scope, timing and

direction of the engagement, and determining the nature, timing and extent of

26 For meaning of the term “Professional Skepticism”, refer the Glossary of Terms

given in the Appendix 1 to the Guidance Note. 27 For meaning of the term “Assurance Skills and Techniques”, refer the Glossary of



43

planned procedures that are required to be carried out in order to achieve the

objective of the engagement.

38. The practitioner should determine whether the criteria are suitable for

the engagement circumstances, including that they exhibit the characteristics

identified in paragraph 21(b)(ii).

39. If it is discovered after the engagement has been accepted that one or

more preconditions for an assurance engagement is not present, the

practitioner should discuss the matter with the appropriate party(ies), and

determine:

(a) Whether the matter can be resolved to the practitioner’s satisfaction;

(b) Whether it is appropriate to continue with the engagement; and

(c) Whether and, if so, how to communicate the matter in the assurance

report.

40. If it is discovered after the engagement has been accepted that some

or all of the applicable criteria are unsuitable or some or all of the underlying

subject matter is not appropriate for an assurance engagement, the

practitioner would need to consider withdrawing from the engagement, if

withdrawal is possible under applicable law or regulation. If the practitioner

continues with the engagement, the practitioner should express a qualified or

adverse opinion/conclusion, or disclaimer of opinion/conclusion, as

appropriate in the circumstances.

Materiality

41. The practitioner would consider materiality when:

(a) Planning and performing the assurance engagement, including when

determining the nature, timing and extent of procedures; and

(b) Evaluating whether the subject matter information is free from material

misstatement.

42. Professional judgments about materiality are made in light of

surrounding circumstances, but are not affected by the level of assurance,

that is, for the same intended users and purpose, materiality for a reasonable

assurance engagement is the same as for a limited assurance engagement

because materiality is based on the information needs of intended users.

43. The applicable criteria may discuss the concept of materiality in the


44

context of the preparation and presentation of the subject matter information

and thereby provide a frame of reference for the practitioner in considering

materiality for the engagement. Although applicable criteria may discuss

materiality in different terms, the concept of materiality generally includes the

matters discussed in paragraphs 42-50. If the applicable criteria do not

include a discussion of the concept of materiality, these paragraphs provide

the practitioner with a frame of reference.

44. Misstatements, including omissions, are considered to be material if

they, individually or in the aggregate, could reasonably be expected to

influence relevant decisions of intended users taken on the basis of the

subject matter information. The practitioner’s consideration of materiality is a

matter of professional judgment, and is affected by the practitioner’s

perception of the common information needs of intended users as a group. In

this context, it is reasonable for the practitioner to assume that intended

users:

(a) Have a reasonable knowledge of the underlying subject matter, and a

willingness to study the subject matter information with reasonable

diligence;

(b) Understand that the subject matter information is prepared and

assured to appropriate levels of materiality, and have an

understanding of any materiality concepts included in the applicable

criteria;

(c) Understand any inherent uncertainties involved in the measuring or

evaluating the underlying subject matter; and

(d) Make reasonable decisions on the basis of the subject matter

information taken as a whole.

Unless the engagement has been designed to meet the particular information

needs of specific users, the possible effect of misstatements on specific

users, whose information needs may vary widely, is not ordinarily

considered.

45. Materiality is considered in the context of qualitative factors and, when

applicable, quantitative factors. The relative importance of qualitative factors

and quantitative factors when considering materiality in a particular

engagement is a matter for the practitioner’s professional judgment.

46. Qualitative factors may include such things as:


45

(a) The number of persons or entities affected by the subject matter.

(b) The interaction between, and relative importance of, various

components of the subject matter information when it is made up of

multiple components, such as a report that includes numerous

performance indicators.

(c) The wording chosen with respect to subject matter information that is

expressed in narrative form.

(d) The characteristics of the presentation adopted for the subject matter

information when the applicable criteria allow for variations in that

presentation.

(e) The nature of a misstatement, for example, the nature of observed

deviations from a control when the subject matter information is a

statement that the control is effective.

(f) Whether a misstatement affects compliance with law or regulation.

(g) In the case of periodic reporting on an underlying subject matter, the

effect of an adjustment that affects past or current subject matter

information or is likely to affect future subject matter information.

(h) Whether a misstatement is the result of an intentional act or is

unintentional.

(i) Whether a misstatement is significant having regard to the

practitioner’s understanding of known previous communications to

users, for example, in relation to the expected outcome of the

measurement or evaluation of the underlying subject matter.

(j) Whether a misstatement relates to the relationship between the

responsible party, the measurer or evaluator, or the engaging party or

their relationship with other parties.

(k) When a threshold or benchmark value has been identified, whether the

result of the procedure deviates from that value.

(l) When the underlying subject matter is a governmental program or

public sector entity, whether a particular aspect of the program or

entity is significant with regard to the nature, visibility and sensitivity of

the program or entity.

(m) When the subject matter information relates to a conclusion on


46

compliance with law or regulation, the seriousness of the

consequences of non-compliance.

47. Quantitative factors relate to the magnitude of misstatements relative

to reported amounts for those aspects of the subject matter information, if

any, that are:

(a) Expressed numerically; or

(b) Otherwise related to numerical values (for example, the number of

observed deviations from a control may be a relevant quantitative

factor when the subject matter information is a statement that the

control is effective).

48. When quantitative factors are applicable, planning the engagement

solely to detect individually material misstatements overlooks the fact that the

aggregate of uncorrected and undetected individually immaterial

misstatements may cause the subject matter information to be materially

misstated. It may therefore be appropriate when planning the nature, timing

and extent of procedures for the practitioner to determine a quantity less than

materiality as a basis for determining the nature, timing and extent of

procedures.

49. Materiality relates to the information covered by the assurance report.

Therefore, when the engagement covers some, but not all, aspects of the

information communicated about an underlying subject matter, materiality is

considered in relation to only that portion that is covered by the engagement.

50. Concluding on the materiality of the misstatements identified as a

result of the procedures performed requires professional judgment. For

example, in a compliance engagement, the entity may have complied with

nine provisions of the relevant law or regulation, but did not comply with one

provision. Professional judgment is needed to conclude whether the entity

complied with the relevant law or regulation as a whole. For example, the

practitioner may consider the significance of the provision with which the

entity did not comply, as well as the relationship of that provision to the

remaining provisions of the relevant law or regulation.

Understanding the Underlying Subject Matter and Other Engagement Circumstances

51. The practitioner should make inquiries of the appropriate party(ies)

regarding:


47

(a) Whether they have knowledge of any actual, suspected or alleged

intentional misstatement or non-compliance with laws and regulations

affecting the subject matter information;

(b) Whether the responsible party has an internal audit function28 and, if

so, make further inquiries to obtain an understanding of the activities

and main findings of the internal audit function with respect to the

subject matter information; and

(c) Whether the responsible party has used any experts in the preparation

of the subject matter information.

Limited Assurance Reasonable Assurance

52L. The practitioner should obtain

an understanding of the underlying

subject matter and other

engagement circumstances

sufficient to:

52R. The practitioner should obtain

an understanding of the underlying

subject matter and other

engagement circumstances

sufficient to:

(a) Enable the practitioner to

identify areas where a

material misstatement of the

subject matter information is

likely to arise; and

(a) Enable the practitioner to

identify and assess the risks of

material misstatement29 in the


(b) Thereby, provide a basis for

designing and performing

procedures to address the

areas identified in paragraph

52L(a) and to obtain limited

assurance to support the

practitioner’s conclusion.

(b) Thereby, provide a basis for

designing and performing

procedures to respond to the

assessed risks and to obtain

reasonable assurance to

support the practitioner’s

opinion.

53L. In obtaining an understanding

of the underlying subject matter

and other engagement

circumstances under paragraph

53R. In obtaining an understanding

of the underlying subject matter and

other engagement circumstances

under paragraph 52R, the

28 For meaning of the term “Internal Audit Function”, refer the Glossary of Terms

given in the Appendix 1 to the Guidance Note. 29 For meaning of the term “Risk of Material Misstatement”, refer the Glossary of



48

52L, the practitioner should

consider the process used to

prepare the subject matter

information.

practitioner should obtain an

understanding of internal control

over the preparation of the subject

matter information relevant to the

engagement. This includes

evaluating the design of those

controls relevant to the engagement

and determining whether they have

been implemented by performing

procedures in addition to the inquiry

of the personnel responsible for the

subject matter information.

Obtaining Evidence

Risk Consideration and Responses to Risks

Limited Assurance Reasonable Assurance

54L. Based on the practitioner’s

understanding (see paragraph

52L), the practitioner should:

(a) Identify areas where a

material misstatement of the

subject matter information is

likely to arise;

(b) Design and perform

procedures to address the

areas identified in paragraph

54L(a) and to obtain limited


practitioner’s conclusion.

54R. Based on the practitioner’s

understanding (see paragraph 52R)

the practitioner should:

(a) Identify and assess the risks of

material misstatement in the


(b) Design and perform procedures

to respond to the assessed risks

and to obtain reasonable


practitioner’s opinion. In addition

to any other procedures on the

subject matter information that

are appropriate in the

engagement circumstances, the

practitioner’s procedures would

include obtaining sufficient

appropriate evidence as to the

operating effectiveness of

relevant controls over the subject

matter information when:


49

(i) The practitioner’s assessment of

the risks of material

misstatement includes an

expectation that controls are

operating effectively, or

(ii) Procedures other than testing of

controls cannot alone provide

sufficient appropriate evidence.

Determining Whether Additional

Procedures are necessary in a

Limited Assurance Engagement

Revision of Risk Assessment in a

Reasonable Assurance Engagement

55L. If the practitioner becomes

aware of a matter(s) that causes

the practitioner to believe that the

subject matter information may be

materially misstated, the

practitioner should design and

perform additional procedures to

obtain further evidence until the

practitioner is able to:

(a) Conclude that the matter is

not likely to cause the subject

matter information to be

materially misstated; or

(b) Determine that the matter(s)

causes the subject matter

information to be materially

misstated.

55R. The practitioner’s assessment of

the risks of material misstatement in

the subject matter information may

change during the course of the

engagement as additional evidence is

obtained. In circumstances where the

practitioner obtains evidence which is

inconsistent with the evidence on

which the practitioner originally based

the assessment of the risks of

material misstatement, the practitioner

should revise the assessment and

modify the planned procedures

accordingly.

56. When designing and performing procedures, the practitioner would

also need to consider the relevance and reliability of the information to be

used as evidence. If:

(a) Evidence obtained from one source is inconsistent with that obtained

from another; or

(b) The practitioner has doubts about the reliability of information to be

used as an evidence, the practitioner should determine what changes

or additions to the procedures are necessary to resolve the matter,


50

and should consider the effect of the matter, if any, on other aspects of

the engagement.

57. The practitioner should accumulate uncorrected misstatements

identified during the engagement other than those that are clearly trivial and

determine the effect of the misstatement on the assurance report.

Work Performed by a Practitioner’s Expert30

58. When the work of a practitioner’s expert is to be used, the practitioner

should also:

(a) Evaluate whether the practitioner’s expert has the necessary

competence, capabilities and objectivity for the practitioner’s purposes.

In the case of a practitioner’s external expert, the evaluation of

objectivity should include inquiry regarding interests and relationships

that may create a threat to that expert’s objectivity;

(b) Obtain a sufficient understanding of the field of expertise of the

practitioner’s expert;

(c) Agree with the practitioner’s expert on the nature, scope and

objectives of that expert’s work; and

(d) Evaluate the adequacy of the practitioner’s expert’s work for the

practitioner’s purposes.

Work Performed by Another Practitioner, a Responsible Party’s or Measurer’s or Evaluator’s Expert, or an Internal Auditor

59. When the work of another practitioner is to be used, the practitioner

should evaluate whether that work is adequate for the practitioner’s

purposes.

60. If information to be used as evidence has been prepared using the

work of a responsible party’s or a measurer’s or evaluator’s expert, the

practitioner should, to the extent necessary having regard to the significance

of that expert’s work for the practitioner’s purposes:

(a) Evaluate the competence, capabilities and objectivity of that expert;

30 For meaning of the term “Practitioner’s Expert”, refer the Glossary of Terms given



51

(b) Obtain an understanding of the work of that expert; and

(c) Evaluate the appropriateness of that expert’s work as evidence.

61. If the practitioner plans to use the work of the internal audit function,

the practitioner should evaluate the following:

(a) The extent to which the internal audit function’s organizational status

and relevant policies and procedures support the objectivity of the

internal auditors;

(b) The level of competence of the internal audit function;

(c) Whether the internal audit function applies a systematic and

disciplined approach, including quality control; and

(d) Whether the work of the internal audit function is adequate for the

purposes of the engagement.

Written Representations

62. The practitioner should request from the appropriate party(ies) a

written representation:

(a) That it has provided the practitioner with all information of which the

appropriate party(ies) is aware that is relevant to the engagement.

(b) Confirming the measurement or evaluation of the underlying subject

matter against the applicable criteria, including that all relevant matters

are reflected in the subject matter information.

63. If, in addition to required representations, the practitioner determines

that it is necessary to obtain one or more written representations to support

other evidence relevant to the subject matter information, the practitioner

should request such other written representations.

64. When written representations relate to matters that are material to the

subject matter information, the practitioner should:

(a) Evaluate their reasonableness and consistency with other evidence

obtained, including other representations (oral or written); and

(b) Consider whether those making the representations can be expected

to be well-informed on the particular matters.

65. The date of the written representations should be as near as

practicable to, but not after, the date of the assurance report.


52

Requested Written Representations Not Provided or Not Reliable

66. If one or more of the requested written representations are not

provided or the practitioner concludes that there is sufficient doubt about the

competence, integrity, ethical values, or diligence of those providing the

written representations, or that the written representations are otherwise not

reliable, the practitioner should:

(a) Discuss the matter with the appropriate party(ies);

(b) Re-evaluate the integrity of those from whom the representations were

requested or received and evaluate the effect that this may have on

the reliability of representations (oral or written) and evidence in

general; and

(c) Take appropriate actions, including determining the possible effect on

the conclusion in the assurance report.

Subsequent Events

67. When relevant to the engagement, the practitioner should consider the

effect on the subject matter information and on the assurance report of

events up to the date of the assurance report,

and should respond appropriately to the facts that become known to the

practitioner after the date of the assurance report, that, had they been known

to the practitioner at that date, may have caused the practitioner to amend

the assurance report. The extent of consideration of subsequent events

depends on the potential for such events to affect the subject matter

information and to affect the appropriateness of the practitioner’s conclusion.

However, the practitioner has no responsibility to perform any procedures

regarding the subject matter information after the date of the assurance

report.

Other Information31

68. When documents containing the subject matter information and the

assurance report thereon include other information, the practitioner should

read that other information to identify material inconsistencies, if any, with

the subject matter information or the assurance report and, if on reading that

31 For meaning of the term “Other Information”, refer the Glossary of Terms given in

the Appendix 1 to the Guidance Note.


53

other information, the practitioner:

(a) Identifies a material inconsistency between that other information and

the subject matter information or the assurance report; or

(b) Becomes aware of a material misstatement of fact32 in that other

information that is unrelated to matters appearing in the subject matter

information or the assurance report,

The practitioner should discuss the matter with the appropriate party(ies) and

take further action as appropriate.

Description of Applicable Criteria

69. The practitioner would need to evaluate whether the subject matter

information adequately refers to or describes the applicable criteria. The

description of the applicable criteria advises intended users of the framework

on which the subject matter information is based, and is particularly

important when there are significant differences between various criteria

regarding how particular matters may be treated in the subject matter

information.

70. A description that the subject matter information is prepared in

accordance with particular applicable criteria is appropriate only if the subject

matter information complies with all relevant requirements of those applicable

criteria that are effective. A description of the applicable criteria that contains

imprecise qualifying or limiting language (for example, “the subject matter

information is in substantial compliance with the requirements of XYZ”) is not

an adequate description as it may mislead users of the subject matter

information.

Forming the Assurance Opinion/Conclusion

71. The practitioner should evaluate the sufficiency and appropriateness

of the evidence obtained in the context of the engagement and, if necessary

in the circumstances, attempt to obtain further evidence. The practitioner

should consider all relevant evidence, regardless of whether it appears to

corroborate or to contradict the measurement or evaluation of the underlying

subject matter against the applicable criteria. If the practitioner is unable to

obtain necessary further evidence, the practitioner should consider the

32 For meaning of the term “Misstatement of Fact”, refer the Glossary of Terms given



54

implications for the practitioner’s opinion/conclusion in paragraph 7233.

72. The practitioner should form an opinion/a conclusion about whether

the subject matter information is free of material misstatement. In forming

that opinion/conclusion, the practitioner should consider the practitioner’s

conclusion in paragraph 71 regarding the sufficiency and appropriateness of

evidence obtained and an evaluation of whether uncorrected misstatements

are material, individually or in the aggregate.

73. Evidence is necessary to support the practitioner’s opinion/conclusion

and assurance report. It is cumulative in nature and is primarily obtained

from procedures performed during the course of the engagement. It may,

however, also include information obtained from other sources, such as

previous engagements (provided the practitioner has determined whether

changes have occurred since the previous engagement that may affect its

relevance to the current engagement) or the quality control procedures for

client acceptance and continuance. Evidence may come from sources inside

and outside the appropriate party(ies). Also, information that may be used as

evidence may have been prepared by an expert employed or engaged by the

appropriate party(ies). Evidence comprises both information that supports

and corroborates aspects of the subject matter information, and any

information that contradicts aspects of the subject matter information. In

addition, in some cases, the absence of information (for example, refusal by

the appropriate party(ies) to provide a requested representation) is used by

the practitioner, and therefore, also constitutes evidence. Most of the

practitioner’s work in forming the assurance opinion/conclusion consists of

obtaining and evaluating evidence.

74. If the practitioner is unable to obtain n sufficient appropriate evidence,

a scope limitation exists and the practitioner should express a qualified

opinion/conclusion or disclaim an opinion/conclusion, or withdraw from the

engagement, where withdrawal is possible under applicable law or

regulation, as appropriate.

Preparing the Assurance Report

75. The assurance report should be in writing and should contain a clear

expression of the practitioner’s opinion/conclusion about the subject matter

information. Where the subject matter information is made up of a number of

33 Refer Para 41- 45 of the Framework for Assurance Engagements.


55

aspects, separate opinions/conclusions may be provided on each aspect. All

such separate opinions/conclusions do not need to relate to the same level of

assurance. Rather, each conclusion is expressed in the form that is

appropriate to either a reasonable assurance engagement or a limited

assurance engagement. References in this Guidance Note to the

opinion/conclusion in the assurance report include each opinion/conclusion

when separate opinions/conclusions are provided.

76. The practitioner’s opinion/conclusion should be clearly separated from

information or explanations that are not intended to affect the practitioner’s

opinion/conclusion, including any Emphasis of Matter, Other Matter, findings

related to particular aspects of the engagements, recommendations or

additional information included in the assurance report. The wording used

should make it clear that an Emphasis of Matter, Other Matter, findings,

recommendations or additional information is not intended to detract from the

practitioner’s opinion/conclusion.

77. Oral and other forms of expressing conclusions can be misunderstood

without the support of a written report. For this reason, the practitioner shall

not report orally without providing a written assurance report.

78. This Guidance Note does not require a standardized format for

reporting on all assurance engagements. Instead, it identifies the basic

elements the assurance report is to include. Assurance reports are tailored to

the specific engagement circumstances. The practitioner may use headings,

paragraph numbers, typographical devices, for example the bolding of text,

and other mechanisms to enhance the clarity and readability of the

assurance report.

79. The practitioner may choose a “short form” or “long form” style of

reporting to facilitate effective communication to the intended users. “Short-

form” reports ordinarily include only the basic elements. “Long-form” reports

include other information and explanations that are not intended to affect the

practitioner’s conclusion. In addition to the basic elements, long-form reports

may describe in detail the terms of the engagement, the applicable criteria

being used, findings relating to particular aspects of the engagement, details

of the qualifications and experience of the practitioner and others involved

with the engagement, disclosure of materiality levels, and, in some cases,

recommendations. The practitioner may find it helpful to consider the

significance of providing such information to the information needs of the


56

intended users. As required by paragraph 76, additional information is clearly

separated from the practitioner’s conclusion and phrased in such a manner

so as make it clear that it is not intended to detract from that conclusion.

Assurance Report Content

80. In order to assert compliance with this Guidance Note, among other

things, the assurance report should include at a minimum the following basic

elements:

(a) A title that clearly indicates the report is an independent assurance

report. An appropriate title helps to identify the nature of the assurance

report, and to distinguish it from reports issued by others, such as

those who do not have to comply with the same ethical requirements

as the practitioner. In case, the applicable law or regulation or the

contractual arrangement entered by the entity specifies a title or

phrases to identify the assurance report, the practitioner may use the

title or phrases so prescribed.

(b) An addressee. An addressee identifies the party or parties to whom

the assurance report is directed. The assurance report is ordinarily

addressed to the engaging party, but in some cases there may be

other intended users.

(c) An identification or description of the level of assurance obtained by

the practitioner, the subject matter information and, when appropriate,

the underlying subject matter. When the practitioner’s conclusion is

phrased in terms of a statement made by the appropriate party, that

statement should accompany the assurance report, be reproduced in

the assurance report or be referenced therein to a source that is

available to the intended users. Identification and description of the

subject matter information and, when appropriate, the underlying

subject matter may include, for example:

The point in time or period of time to which the measurement or

evaluation of the underlying subject matter relates.

Where applicable, the name of the responsible party or

component of the responsible party to which the underlying

subject matter relates.

An explanation of those characteristics of the underlying subject

matter or the subject matter information of which the intended


57

users should be aware, and how such characteristics may

influence the precision of the measurement or evaluation of the

underlying subject matter against the applicable criteria, or the

persuasiveness of available evidence. For example:

o The degree to which the subject matter information is

qualitative versus quantitative, objective versus

subjective, or historical versus prospective.

o Changes in the underlying subject matter or other

engagement circumstances that affect the comparability

of the subject matter information from one period to the

next.

(d) Identification of the applicable criteria. The assurance report identifies

the applicable criteria against which the underlying subject matter was

measured or evaluated so that the intended users can understand the

basis for the practitioner’s opinion/conclusion. The assurance report

may include the applicable criteria, or refer to them if they are included

in the subject matter information or if they are otherwise available from

a readily accessible source. It may be relevant in the circumstances, to

disclose:

The source of the applicable criteria, and whether or not the

applicable criteria are embodied in law or regulation, or issued

by authorized or recognized bodies of experts that follow a

transparent due process, that is, whether they are established

criteria in the context of the underlying subject matter (and if

they are not, a description of why they are considered suitable).

Measurement or evaluation methods used when the applicable

criteria allows for choice between a number of methods.

Any significant interpretations made in applying the applicable

criteria in the engagement circumstances.

Whether there have been any changes in the measurement or

evaluation methods used.

(e) Where appropriate, a description of any significant inherent limitations

associated with the measurement or evaluation of the underlying

subject matter against the applicable criteria. While in some cases,

inherent limitations can be expected to be well-understood by the


58

intended users of an assurance report, in other cases it may be

appropriate to make explicit reference to them in the assurance report.

For example, in an assurance report related to the effectiveness of

internal control, it may be appropriate to note that the historic

evaluation of effectiveness is not relevant to future periods due to the

risk that internal control may become inadequate because of changes

in conditions, or that the degree of compliance with policies or

procedures may deteriorate.

(f) When the applicable criteria are designed for a specific purpose, a

statement alerting readers to this fact and that, as a result, the subject

matter information may not be suitable for another purpose. In some

cases the applicable criteria used to measure or evaluate the

underlying subject matter may be designed for a specific purpose. For

example, a regulator may require certain entities to use particular

applicable criteria designed for regulatory purposes. To avoid

misunderstandings, the practitioner alerts readers of the assurance

report to this fact and that therefore, the subject matter information

may not be suitable for another purpose.

In addition to the alert as required in the preceding paragraph, the

practitioner may consider it appropriate to indicate that the assurance

report is intended solely for specific users. Depending on the

engagement circumstances, for example, the law or regulation of the

particular jurisdiction, this may be achieved by restricting the

distribution or use of the assurance report. While an assurance report

may be restricted in this way, the absence of a restriction regarding a

particular user or purpose does not itself indicate that a legal

responsibility is owed by the practitioner in relation to that user or for

that purpose. Whether a legal responsibility is owed will depend on the

legal circumstances of each case and the relevant jurisdiction.

(g) A statement to identify the responsible party and the measurer or

evaluator if different, and to describe their responsibilities and the

practitioner’s responsibilities. Identifying relative responsibilities

informs the intended users that the responsible party is responsible for

the underlying subject matter, that the measurer or evaluator is

responsible for the measurement or evaluation of the underlying

subject matter against the applicable criteria, and that the

Practitioner’s role is to independently express an opinion/conclusion

about the subject matter information.


59

(h) A statement that the engagement was performed in accordance with

this Guidance Note.

(i) A statement that the firm, of which the practitioner is a partner has

applied SQC 1, Quality Control for Firms that Perform Audits and

Reviews of Historical Financial Information, and Other Assurance and

Related Services Engagements.

(j) A statement that the practitioner complies with the independence and

other ethical requirements of the Code of Ethics issued by the Institute

of Chartered Accountants of India. The following is an illustration of a

statement in the assurance report regarding compliance with ethical

requirements:

“We conducted our engagement in accordance with the Guidance Note

on Reports or Certificates for Special Purposes issued by the Institute

of Chartered Accountants of India. That Guidance Note requires that

we comply with the ethical requirements of the Code of Ethics issued

by the Institute of Chartered Accountants of India.”

(k) An informative summary of the work performed as the basis for the

practitioner’s opinion/conclusion. In the case of a limited assurance

engagement, an appreciation of the nature, timing, and extent of

procedures performed is essential to understanding the practitioner’s

opinion/conclusion. In a limited assurance engagement, the summary

of the work performed should state that:

(i) The procedures performed in a limited assurance engagement

vary in nature and timing from, and are less in extent than for, a

reasonable assurance engagement; and

(ii) Consequently, the level of assurance obtained in a limited

assurance engagement is substantially lower than the

assurance that would have been obtained had a reasonable

assurance engagement been performed.

It is important that the summary be written in an objective way that

allows intended users to understand the work done as the basis for the

practitioner’s opinion/conclusion. In most cases, this will not involve

detailing the entire work plan, but on the other hand it is important for

it not to be so summarized as to be ambiguous, nor written in a way

that is overstated or embellished.


60

(l) The practitioner’s opinion/conclusion:

(i) When appropriate, the opinion/conclusion should inform the

intended users of the context in which the practitioner’s

opinion/conclusion is to be read.

It may be appropriate to inform the intended users of the context

in which the practitioner’s opinion/conclusion is to be read when

the assurance report includes an explanation of particular

characteristics of the underlying subject matter of which the

intended users should be aware. The practitioner’s

opinion/conclusion may, for example, include wording such as:

“This opinion/conclusion has been formed on the basis of the

matters outlined elsewhere in this independent assurance

report.”

(ii) In a reasonable assurance engagement, the opinion is

expressed in a positive form. Examples of opinion expressed in

a form appropriate for a reasonable assurance engagement

include:

When expressed in terms of the underlying subject matter

and the applicable criteria, “In our opinion, the entity has

complied, in all material respects, with XYZ law”;

When expressed in terms of the subject matter

information and the applicable criteria, “In our opinion,

the Statement of Net Worth is properly prepared, in all

material respects, based on XYZ criteria”; or

When expressed in terms of a statement made by the

appropriate party, “In our opinion, the [appropriate

party’s] statement that the entity has complied with XYZ

law is, in all material respects, fairly stated,” or “In our

opinion, the [appropriate party’s] statement that the key

performance indicators are presented in accordance with

XYZ criteria is, in all material respects, fairly stated”.

(iii) In a limited assurance engagement, the conclusion is expressed

in a form that conveys whether, based on the procedures

performed and evidence obtained, a matter(s) has come to the

practitioner’s attention to cause the practitioner to believe that


61

the subject matter information is materially misstated. Examples

of conclusions expressed in a form appropriate for a limited

assurance engagement include:

When expressed in terms of the underlying subject matter

and the applicable criteria, “Based on the procedures

performed and evidence obtained, nothing has come to

our attention that causes us to believe that [the entity]

has not complied, in all material respects, with XYZ law.”

When expressed in terms of the subject matter

information and the applicable criteria, “Based on the

procedures performed and evidence obtained, we are not

aware of any material amendments that need to be made

to the assessment of key performance indicators for them

to be in accordance with XYZ criteria.”; or

When expressed in terms of a statement made by the

appropriate party, “Based on the procedures performed

and evidence obtained, nothing has come to our attention

that causes us to believe that the [appropriate party’s]

statement that [the entity] has complied with XYZ law, is

not, in all material respects, fairly stated.”

(iv) The opinion/conclusion in (ii) or (iii) should be phrased using

appropriate words for the underlying subject matter and

applicable criteria given the engagement circumstances and

need to be phrased in terms of:

a. The underlying subject matter and the applicable criteria;

b. The subject matter information and the applicable criteria;

or

c. A statement made by the appropriate party.

Forms of expression which may be useful for underlying subject

matters include, for example, one, or a combination of, the

following:

For compliance engagements—“in compliance with” or “in

accordance with.”

For engagements when the applicable criteria describe a


62

process or methodology for the preparation or

presentation of the subject matter information—“properly

prepared.”

For engagement when the principles of fair presentation

are embodied in the applicable criteria—“fairly stated.”

(v) When the practitioner expresses a modified opinion/conclusion,

the assurance report should contain:

a. A section that provides a description of the matter(s)

giving rise to the modification; and

b. A section that contains the practitioner’s modified

opinion/conclusion

(m) The practitioner’s signature. The assurance report is signed by the

practitioner in his personal name. Where a Firm is appointed to carry

out the engagement, the report is signed in the personal name of the

practitioner and in the name of the audit firm. The partner/proprietor

signing the assurance report also needs to mention the membership

number assigned by the ICAI. They also include the registration

number of the Firm, wherever applicable, as allotted by ICAI, in the

assurance reports signed by them.

(n) The date of the assurance report. The assurance report should be

dated no earlier than the date on which the practitioner has obtained

the evidence on which the practitioner’s opinion/conclusion is based,

including evidence that those with the recognized authority have

asserted that they have taken responsibility for the subject matter

information.

(o) The place of signature.

Reference to the Practitioner’s Expert in the Assurance Report

81. If the practitioner refers to the work of a practitioner’s expert in the

assurance report, the wording of that report should not imply that the

practitioner’s responsibility for the opinion/conclusion expressed in that

report is reduced because of the involvement of that expert.


63

Assurance Report Prescribed by Law or Regulation

82. If the practitioner is required by law or regulation to use a specific

layout or wording of the assurance report, the assurance report should refer

to this Guidance Note, only if the assurance report includes, at a minimum,

each of the elements identified in paragraph 80.

Unmodified and Modified Opinions/Conclusions

83. The practitioner should express an unmodified opinion/conclusion

when the practitioner concludes:

(a) In the case of a reasonable assurance engagement, that the subject

matter information is prepared, in all material respects, in accordance

with the applicable criteria; or

(b) In the case of a limited assurance engagement, that, based on the

procedures performed and evidence obtained, no matter(s) has come

to the attention of the practitioner that causes the practitioner to

believe that the subject matter information is not prepared, in all

material respects, in accordance with the applicable criteria.

84. If the practitioner considers it necessary to:

(a) Draw intended users’ attention to a matter presented or disclosed in

the subject matter information that, in the practitioner’s judgment, is of

such importance that it is fundamental to intended users’

understanding of the subject matter information (an Emphasis of

Matter paragraph); or

(b) Communicate a matter other than those that are presented or

disclosed in the subject matter information that, in the practitioner’s

judgment, is relevant to intended users’ understanding of the

engagement, the practitioner’s responsibilities or the assurance report

(an Other Matter paragraph),

and this is not prohibited by law or regulation, the practitioner may do

so in a paragraph in the assurance report, with an appropriate

heading, that clearly indicates the practitioner’s opinion/conclusion is

not modified in respect of the matter/s. In the case of an Emphasis of

Matter paragraph, such a paragraph should refer only to the

information presented or disclosed in the subject matter information.


64

85. The practitioner would need to express a modified opinion/conclusion

in the following circumstances:

(a) When, in the practitioner’s professional judgment, a scope limitation

exists and the effect of the matter could be material. In such cases, the

practitioner should express a qualified opinion/conclusion or a

disclaimer of opinion/conclusion.

(b) When, in the practitioner’s professional judgment, the subject matter

information is materially misstated. In such cases, the practitioner

should express a qualified opinion/conclusion or adverse

opinion/conclusion.

Examples of qualified and adverse opinions/conclusions and a

disclaimer of opinions/conclusion are:

Qualified conclusion (an example for limited assurance

engagements with a material misstatement) – “Based on the

procedures performed and the evidence obtained, except for the

effect of the matter described in the Basis for Qualified

Conclusion section of our report, nothing has come to our

attention that causes us to believe that the [appropriate party’s]

statement does not present fairly, in all material respects, the

entity’s compliance with XYZ law.”

Adverse opinion (an example for a material and pervasive

misstatement for both reasonable assurance and limited

assurance engagements) – “Because of the significance of the

matter described in the Basis for Adverse Opinion/Conclusion

section of our report, the [appropriate party’s] statement does

not present fairly the entity’s compliance with XYZ law.”

Disclaimer of conclusion (an example for a material and

pervasive limitation of scope for both reasonable assurance and

limited assurance engagements) – “Because of the significance

of the matter described in the Basis for Disclaimer of

Opinion/Conclusion section of our report, we have not been able

to obtain sufficient appropriate evidence to form an opinion/

conclusion on the [appropriate party’s] statement. Accordingly,

we do not express an opinion/ conclusion on that statement.”

86. The practitioner should express a qualified opinion/conclusion when, in

the practitioner’s professional judgment, the effects, or possible effects, of a


65

matter are not so material and pervasive as to require an adverse

opinion/conclusion or a disclaimer of opinion/conclusion. A qualified

opinion/conclusion should be expressed as being “except for” the effects, or

possible effects, of the matter to which the qualification relates.

87. The term ‘pervasive’ describes the effects on the subject matter

information of misstatements or the possible effects on the subject matter

information of misstatements, if any, that are undetected due to an inability to

obtain sufficient appropriate evidence. Pervasive effects on the subject

matter information are those that, in the practitioner’s professional judgment:

(a) Are not confined to specific aspects of the subject matter information;

(b) If so confined, represent or could represent a substantial proportion of

the subject matter information; or

(c) In relation to disclosures, are fundamental to the intended users’

understanding of the subject matter information.

(d) The nature of the matter, and the practitioner’s judgment about the

pervasiveness of the effects or possible effects on the subject matter

information, affects the type of conclusion to be expressed.

88. If the practitioner expresses a modified opinion/conclusion because of

a scope limitation but is also aware of a matter(s) that causes the subject

matter information to be materially misstated, the practitioner should include

in the assurance report a clear description of both the scope limitation and

the matter(s) that causes the subject matter information to be materially

misstated.

89. When the statement made by the appropriate party has Identified and

properly described that the subject matter information is materially misstated,

the practitioner should either:

(a) Express a qualified opinion/conclusion or adverse opinion/conclusion

phrased in terms of the underlying subject matter and the applicable

criteria; or

(b) If specifically required by the terms of the engagement to phrase the

opinion/conclusion in terms of a statement made by the appropriate

party, express an unqualified opinion/conclusion but include an

Emphasis of Matter paragraph in the assurance report, referring to the

statement made by the appropriate party that identifies and properly


66

describes that the subject matter information is materially misstated. In

some cases, the measurer or evaluator may identify and properly

describe that the subject matter information is materially misstated.

For example, in a compliance engagement the measurer or evaluator

may correctly describe the instances of non- compliance. In such

circumstances, paragraph 88 requires the practitioner to draw the

intended users’ attention to the description of the material

misstatement, by either expressing a qualified or adverse

opinion/conclusion or by expressing an unqualified opinion/conclusion

but emphasizing the matter by specifically referring to it in the

assurance report.

90. Appendix 2 to the Guidance Note contains illustrative formats of

Reports/Certificates.

Other Communication Responsibilities

91. The practitioner should consider whether, pursuant to the terms of the

engagement and other engagement circumstances, any matter has come to

the attention of the practitioner that is to be communicated with the

responsible party, the measurer or evaluator, the engaging party, those

charged with governance or others.

Documentation

92. The practitioner should prepare on a timely basis engagement

documentation that provides a record of the basis for the assurance report

that is sufficient and appropriate to enable an experienced practitioner,

having no previous connection with the engagement, to understand:

(a) The nature, timing and extent of the procedures performed to comply

with the Guidance Note and applicable legal and regulatory

requirements;

(b) The results of the procedures performed, and the evidence obtained;

and

(c) Significant matters arising during the engagement, the conclusions

reached thereon, and significant professional judgments made in

reaching those conclusions.

93. If the practitioner identifies information that is inconsistent with the

practitioner’s final opinion/conclusion regarding a significant matter, the


67

practitioner should document how the practitioner addressed the

inconsistency.

94. The practitioner should assemble the engagement documentation in

an engagement file and complete the administrative process of assembling

the final engagement file on a timely basis after the date of the assurance

report. SQC 1 requires establishment of policies and procedures for the

timely completion of the assembly of engagement files. An appropriate time

limit within which to complete the assembly of the final engagement file is

ordinarily not more than 60 days after the date of the assurance report.

95. The completion of the assembly of the final engagement file after the

date of the assurance report is an administrative process that does not

involve the performance of new procedures or the drawing of new

opinion/conclusions. Changes may, however, be made to the documentation

during the final assembly process if they are administrative in nature.

Examples of such changes include:

Deleting or discarding superseded documentation.

Sorting, collating and cross-referencing working papers.

Signing off on completion checklists relating to the file assembly

process.

Documenting evidence that the practitioner has obtained, discussed

and agreed with the relevant practitioners of the engagement team

before the date of the assurance report.

96. After the assembly of the final engagement file has been completed,

the practitioner should not delete or discard engagement documentation of

any nature before the end of its retention period. The retention period for

assurance engagements ordinarily is no shorter than seven years from the

date of assurance report.34

97. If the practitioner finds it necessary to amend existing engagement

documentation or add new engagement documentation after the assembly of

the final engagement file has been completed the practitioner should,

regardless of the nature of the amendments or additions, document:

a) The specific reasons for making the amendments or additions; and

b) When, and by whom, they were made and reviewed.

34 Refer Para 83 of SQC 1


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APPENDIX 1

Glossary of Terms Used in the Guidance Note

For purposes of this Guidance Note, the following terms have the meanings

attributed below.

1. Assurance engagement―An engagement in which a practitioner aims

to obtain sufficient appropriate evidence in order to express an

opinion/conclusion, designed to enhance the degree of confidence of

the intended users, other than the responsible party about the subject

matter information (that is, the outcome of the measurement or

evaluation of an underlying subject matter against criteria). Each

assurance engagement is classified on two dimensions:

Either a reasonable assurance engagement or a limited

assurance engagement:

o Reasonable assurance engagement―An assurance

engagement in which the practitioner reduces

engagement risk to an acceptably low level in the

circumstances of the engagement, as the basis for the

practitioner’s opinion. The practitioner’s opinion is

expressed in a form that conveys the practitioner’s

opinion on the outcome of the measurement or evaluation

of the underlying subject matter against the criteria.

o Limited assurance engagement―An assurance

engagement in which the practitioner reduces

engagement risk to a level that is acceptable in the

circumstances of the engagement but where that risk is

greater than for a reasonable assurance engagement, as

the basis for expressing a conclusion in a form that

conveys whether, based on the procedures performed

and evidence obtained, a matter(s) has(have) come to

the practitioner’s attention to cause the practitioner to

believe that the subject matter information is

materially misstated. The nature, timing, and extent of

procedures performed in a limited assurance engagement is

limited compared with that necessary in a reasonable assurance

engagement but is planned to obtain a level of assurance that

is, in the practitioner’s professional judgment, meaningful.


69

Either assertion based engagement or a direct reporting

engagement:

o Assertion based engagement―An assurance

engagement in which a party other than the practitioner

measures or evaluates the underlying subject matter

against the criteria. A party other than the practitioner

also often presents the resulting subject matter

information in a report or statement. In some cases,

however, the subject matter information may be

presented by the practitioner in the assurance report. In

an attestation engagement, the practitioner’s conclusion

addresses whether the subject matter information is free

from material misstatement. The practitioner’s conclusion

may be phrased in terms of:

(i) The underlying subject matter and the applicable

criteria;

(ii) The subject matter information and the applicable

criteria; or

(iii) A statement made by the appropriate party.

o Direct reporting engagement―An assurance engagement

in which the practitioner measures or evaluates the

underlying subject matter against the applicable criteria

and the practitioner presents the resulting subject matter

information as part of, or accompanying, the assurance

report. In a direct engagement, the practitioner’s

conclusion addresses the reported outcome of the

measurement or evaluation of the underlying subject

matter against the criteria.

2. Assurance skills and techniques―Those planning, evidence gathering,

evidence evaluation, communication and reporting skills and

techniques demonstrated by an assurance practitioner that are distinct

from expertise in the underlying subject matter of any particular

assurance engagement or its measurement or evaluation. Assurance

skill and techniques include:


70

Application of professional skepticism and professional

judgment;

Planning and performing an assurance engagement, including

obtaining and evaluating evidence;

Understanding information systems and the role and limitations

of internal control;

Linking the consideration of materiality and engagement risks to

the nature, timing and extent of procedures;

Applying procedures as appropriate to the engagement (which

may include inquiry, inspection, re-calculation, re- performance,

observation, confirmation, and analytical procedures); and

Systematic documentation practices and assurance report-

writing skills.

3. Criteria―The benchmarks used to measure or evaluate the underlying

subject matter. The “applicable criteria” are the criteria used for the

particular engagement. Suitable criteria are required for reasonably

consistent measurement or evaluation of an underlying subject matter

within the context of professional judgment. Without the frame of

reference provided by suitable criteria, any conclusion is open to

individual interpretation and misunderstanding. The suitability of

criteria is context-sensitive, that is, it is determined in the context of

the engagement circumstances. Even for the same underlying subject

matter there can be different criteria, which will yield a different

measurement or evaluation. For example, a measurer or evaluator

might select, as one of the criteria for the underlying subject matter of

customer satisfaction, the number of customer complaints resolved to

the acknowledged satisfaction of the customer; another measurer or

evaluator might select the number of repeat purchases in the three

months following the initial purchase. The suitability of criteria is not

affected by the level of assurance, that is, if criteria are unsuitable for

a reasonable assurance engagement, they are also unsuitable for a

limited assurance engagement, and vice versa. Suitable criteria

include, when relevant, criteria for presentation and disclosure.

4. Engagement circumstances ― The broad context defining the

particular engagement, which includes the terms of the engagement;

whether it is a reasonable assurance engagement or a limited


71

assurance engagement, the characteristics of the underlying subject

matter; the measurement or evaluation criteria; the information needs

of the intended users; relevant characteristics of the responsible party,

the measurer or evaluator, and the engaging party and their

environment; and other matters, for example events, transactions,

conditions and practices, that may have a significant effect on the

engagement.

5. Engagement partner ― The partner or other person in the firm who is

a member of the Institute of Chartered Accountants of India and is in

full time practice and is responsible for the engagement and its

performance, and for the assurance report that is issued on behalf of

the firm, and who, where required, has the appropriate authority from a

professional, legal or regulatory body.

6. Engagement risk ― The risk that the practitioner expresses an

inappropriate conclusion when the subject matter information is

materially misstated35.

7. Engaging party ― The party(ies) that engages the practitioner to

perform the assurance engagement. The engaging party may be under

different circumstances, management or those charged with

governance of the responsible party, a legislature, the intended users,

the measurer or evaluator, or a different third party

8. Engagement team ― All personnel performing an engagement,

including any experts contracted by the firm in connection with that

engagement.

9. Evidence ― Information used by the practitioner in arriving at the

practitioner’s conclusion. Evidence includes both, information

contained in relevant information systems, if any, and other

information

10. Firm ― A sole practitioner/proprietor, partnership or any such entity of

professional accountants, as may be permitted by law.

11. Historical financial information ― Information expressed in financial

terms in relation to a particular entity, derived primarily from that

entity’s accounting system, about economic events occurring in past

35 Refer to Para 47-48 and Para 51 of the Framework for Assurance Engagements.


72

time periods or about economic conditions or circumstances at points

in time in the past.

12. Internal audit function – A function of an entity that performs

assurance and consulting activities, designed to evaluate and improve

the effectiveness of the entity’s governance, risk management and

internal control processes.

13. Intended users ― The individual(s) or organization(s), or group(s)

thereof that the practitioner expects will use the assurance report.

In some cases there may be intended users other than those to whom

the assurance report is addressed. The practitioner may not be able to

identify all those who will read the assurance report, particularly,

where a large number of people have access to it. In such cases,

particularly where possible, users are likely to have a broad range of

interests in the underlying subject matter, intended users may be

limited to major stakeholders with significant and common interests.

Intended users may be identified in different ways, for example, by

agreement between the practitioner and the responsible party or

engaging party, or by law or regulation.

Intended users or their representatives may be directly involved with

the practitioner and the responsible party (and the engaging party, if

different) in determining the requirements of the engagement.

Regardless of the involvement of others however, and unlike an

agreed-upon procedures engagement (which involves reporting factual

findings based upon procedures agreed with the engaging party and

any appropriate third parties, rather than a conclusion):

(a) The practitioner is responsible for determining the nature, timing

and extent of procedures; and

(b) The practitioner may need to perform additional procedures, if

information comes to the practitioner’s attention that differs

significantly from that on which the determination of planned

procedures was based.

In some cases, intended users (for example, bankers and regulators)

impose a requirement on, or request the appropriate party(ies) to

arrange for an assurance engagement to be performed for a specific

purpose. When engagements use criteria that are designed for a


73

specific purpose, paragraph 80 requires a statement alerting readers

to this fact. In addition, the practitioner may consider it appropriate to

indicate that the assurance report is intended solely for specific users.

Depending on the engagement circumstances, this may be achieved

by restricting the distribution or use of the assurance report.

14. Measurer or evaluator ― The party(ies) who measures or evaluates

the underlying subject matter against the criteria. The measurer or

evaluator possesses expertise in the underlying subject matter. In

many attestation engagements, the responsible party may also be the

measurer or evaluator, and the engaging party. The measurer or

evaluator is responsible for having a reasonable basis for the subject

matter information. What constitutes a reasonable basis will depend on

the nature of the underlying subject matter and other engagement

circumstances. In some cases, a formal process with extensive

internal controls may be needed to provide the measurer or evaluator

with a reasonable basis that the subject matter information is free from

material misstatement. The fact that the practitioner will report on the

subject matter information is not a substitute for the measurer or

evaluator’s own processes to have a reasonable basis for the subject

matter information.

15. Misstatement ― A difference between the subject matter information

and the appropriate measurement or evaluation of the underlying

subject matter in accordance with the criteria. Misstatements can be

intentional or unintentional, qualitative or quantitative, and include

omissions.

16. Misstatement of fact (with respect to other information)―Other

information that is unrelated to matters appearing in the subject matter

information or the assurance report that is incorrectly stated or

presented. A material misstatement of fact may undermine the

credibility of the document containing the subject matter information.

17. Other information ― Information (other than the subject matter

information and the assurance report thereon) which is included, either

by law, regulation or custom, in a document containing the subject

matter information and the assurance report thereon.

18. Practitioner’s expert ― An individual or organization possessing

expertise in a field other than assurance, whose work in that field is


74

used by the practitioner to assist the practitioner in obtaining sufficient

appropriate evidence. A practitioner’s expert may be either a

practitioner’s internal expert (who is a partner or staff, including

temporary staff, of the practitioner’s firm or a network firm), or a

practitioner’s external expert.

19. Professional judgment ―The application of relevant training,

knowledge and experience, within the context provided by assurance

and ethical standards, in making informed decisions about the courses

of action that are appropriate in the circumstances of the engagement.

20. Professional skepticism ― An attitude that includes a questioning

mind, being alert to conditions which may indicate possible

misstatement, and a critical assessment of evidence.

21. Responsible party ― The party(ies) responsible for the underlying

subject matter. All assurance engagements have at least three parties:

the responsible party, the practitioner, and the intended users. In many

attestation engagements, the responsible party may also be the

measurer or evaluator, and the engaging party.

22. Risk of material misstatement ― The risk that the subject matter

information is materially misstated prior to the engagement.

23. Subject matter information ― The outcome of the measurement or

evaluation of the underlying subject matter against the criteria, i.e., the

information that results from applying the criteria to the underlying

subject matter. In some cases, the subject matter information may be

a statement that evaluates an aspect of a process, or of performance

or compliance, in relation to the criteria. For example, “ABC’s

governance structure conformed with XYZ criteria during the period …”

24. Underlying subject matter―The phenomenon that is measured or

evaluated by applying criteria.


75

APPENDIX 2

Illustrative Formats of Reports/Certificates

Note: The illustrative formats of assurance reports or certificates for

special purposes given in Appendix 2 should be tailored by the practitioner

to meet the specific circumstances and requirements of the engagement.

Illustration 1: Practitioner’s Report for Turnover/Net Worth/Net

Profit/Working Capital/similar engagement pursuant to a Tender

requirement

The Board of Directors [Name of the Company] [Company Address]

Independent Practitioner’s Report on the Statement of [Annual Turnover

for financial years ended………and………… (specify periods); Current

Assets; Current Liabilities; Computation of Working Capital and

Computation of Net worth as at… ....... (specify date)]

1. This Report is issued in accordance with the terms of our engagement

letter/agreement dated ……………………[specify date].

2. The accompanying Statement of Annual Turnover for financial years

ended ………… and ………… (specify period) and the Statement of

Current Assets; Current Liabilities; Working Capital and Net Worth as

at ………………… (specify date) (hereinafter referred together as the

“Statement”) contains the details as required pursuant to compliance

with the terms and conditions contained in …………………… [refer to

the clause] of the Tender document issued by …………………… [refer

to the authority] dated ………… (specify date) with reference [specify

the contract reference if available] (hereinafter referred to as the

“Tender Document”), which we have initialled for identification

purposes only.

Management’s Responsibility for the Statement

3. The preparation of the Statement is the responsibility of the

Management of ................................... [Name of the Company]

(hereinafter the “Company”) including the preparation and

maintenance of all accounting and other relevant supporting records

and documents. This responsibility includes the design,

implementation and maintenance of internal control relevant to the

preparation and presentation of the Statement and applying an


76

appropriate basis of preparation; and making estimates that are

reasonable in the circumstances.

4. The Management is also responsible for ensuring that the Company

complies with the requirements of the Tender Document and provides

all relevant information to …………………….. [Name of the authority].


5. Pursuant to the requirements of the Tender Document, it is our

responsibility to provide a reasonable assurance whether:

i) the amounts in the Statement of Annual Turnover for the year

ended ………… (specify period) have been accurately extracted

from the audited financial statements;

ii) the amounts in the Statement in respect of current assets and

current liabilities that form part of the working capital

computation have been accurately extracted from the audited

financial statements for the year ended (specify the period) and

the computation of working capital is arithmetically correct;

iii) the amounts in the Statement that form part of the Net Worth


financial statements for the year ended; and [month][date][year]

and the computation of net worth is arithmetically correct; and

iv) the computation of net worth and working capital is in

accordance with the method of computation set out in the clause

[ ] of the Tender Document.

6. The audited financial statements referred to in paragraph 5 above,

have been audited by us, on which we issued an unmodified audit

opinion vide our report(s) dated ………………………… (specify dates)

respectively. Our audits of these financial statements were conducted

in accordance with the Standards on Auditing and other applicable

authoritative pronouncements issued by the Institute of Chartered

Accountants of India. Those Standards require that we plan and

perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement.


the Guidance Note on Reports or Certificates for Special Purposes

issued by the Institute of Chartered Accountants of India. The

Guidance Note requires that we comply with the ethical requirements


77

of the Code of Ethics issued by the Institute of Chartered Accountants

of India.


Standard on Quality Control (SQC) 1, Quality Control for Firms that

Perform Audits and Reviews of Historical Financial Information, and

Other Assurance and Related Services Engagements.

Opinion

9. Based on our examination, as above, we are of the opinion that:

i) the amounts in the Statement in respect of Annual Turnover,

Current assets and Current liabilities have been accurately

extracted from the audited financial statements for the years

ended [date] and [date];

ii) the amounts that form part of the working capital and net worth


financial statements for the years ended

……………………[specify date] and [specify date]; and that the

computation of working capital and net worth in the Statement is

mathematically accurate and is in accordance with the method

of computation set out in the clause [ ] of the Tender Document.

Restriction on Use

10. The certificate is addressed to and provided to the Board of Directors

of the Company solely for the purpose to enable comply with

requirement of Tender Document and to submit the accompanying

Statement to [specify the authority], and should not be used by any

other person or for any other purpose. Accordingly, we do not accept

or assume any liability or any duty of care for any other purpose or to

any other person to whom this certificate is shown or into whose hands

it may come without our prior consent in writing.

For XYZ and Co. Chartered Accountants Firm’s Registration Number

Signature (Name of the Member Signing the Assurance Report)

(Designation36)

Membership Number

Place of Signature

Date

36 Partner or Proprietor, as the case may be.


78

Illustration 2: Auditor’s Annual Activity Certificate for Indian Branch

Office/Liaison Office of Foreign Companies

The Authorised Representatives,

[Name of the Branch Office/Liaison Office] [Address]

Independent Auditor’s Annual Activity Certificate for Indian Branch of

[Name of the Foreign Company]

1. This Certificate is issued in accordance with the terms of our

agreement dated [date].

2. [Name of the Indian Branch /Liaison Office], (the “Indian Branch”/

“Liaison Office/s”) with PAN No. [Insert PAN Number of the Branch

/Liaison Office/s] of [Name of the Foreign Company] (UIN [Insert UIN])

was established to undertake certain activities specifically permitted by

the Reserve Bank of India (the “RBI”) vide its approval letter/s No/s. [*]

(the “letter/s”).

Authorised Representatives’ Responsibility

3. The Authorised Representatives of the Branch Office/Liaison Office

are responsible for ensuring that the Indian Branch/ Liaison Office

complies with the requirement of approval letter and for providing all

relevant information to the RBI.

Auditor’s Responsibility

4. Pursuant to the requirements of the RBI Master Circular No. 7 dated

July 02, 2012 (the “Circular”), our responsibility is to express

reasonable assurance in the form of an opinion based on our audit and

examination of books and records as to whether the Indian Branch/

Liaison Office/s has/ have undertaken only those activities that have

been specifically permitted by the RBI and has/ have complied with the

specified terms and conditions.

5. We audited the financial statements of [Name of the Indian Branch

/Liaison Office] as of and for the financial year ended 31 March XXXX,

on which we issued an unmodified audit opinion vide our reports dated

………………… (specify date). Our audits of these financial statements

were conducted in accordance with the Standards on Auditing and

other applicable authoritative pronouncements issued by the Institute

of Chartered Accountants of India. Those Standards require that we

plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement.




79




of India.





Opinion

8. Based on our audit of financial statements for the year ended 31

March 20XX and the information and explanations given to us, we are

of the opinion that the [Name of the Branch /Liaison Office/s] has/

have37 undertaken only those activities during the period from [month]

[date], [year] to [month] [date] that have been specifically permitted by

the Reserve Bank of India, vide its approval letter/s38 No/s39 [ ] dated

[month][date], [year] and has/have40 complied with the terms and

conditions specified in the above mentioned letter/s.

Restriction on Use

9. This certificate has been prepared at the request of the [Name of the

Branch Office/Liaison Office] solely with reference to the Circular, as

amended from time to time. It should not be used by any other person

or for any other purpose. Accordingly, we do not accept or assume any

liability or any duty of care or for any other purpose or to any other

party to whom it is shown or into whose hands it may come without our

prior consent in writing.



(Designation41)

Membership Number

Place of Signature

Date

37 As Applicable 38 As Applicable 39 As Applicable 40 As Applicable 41 Partner or Proprietor, as the case may be.


80

Illustration 3: Auditor’s Report on the Manner of Utilization of Funds

required under Securities and Exchange Board of India (Listing

Obligations and Disclosure Requirements) Regulations, 2015


Independent Auditor’s Report on the manner of utilization of the funds

including for purposes other than those stated in the offer document

1. This report is issued in accordance with the terms of our agreement

dated [●].

2. The accompanying Statement contains details of manner of the

utilization of funds including funds utilized for purposes other than

those stated in the offer document for the Rights Issue (the

“Statement”), as required by the Clause 32(5) of Securities and

Exchange Board of India (Listing Obligations and Disclosure

Requirements) Regulations, 2015, by the [Name of the Company] (the

“Company”), which we have initialled for identification purposes only.

The Funds were raised by the Company pursuant to the rights issue of

[*] equity shares of face value of Rs. [ ] each, at a premium of Rs. [*]

each, aggregating to Rs. [*].

Managements’ Responsibility for the Statement

3. The preparation of the accompanying Statement is the responsibility of

the Management of the Company. This responsibility includes

designing, implementing and maintaining internal control relevant to

the preparation and presentation of the Statement, and applying an

appropriate basis of preparation; and making estimates that are

reasonable in the circumstances.

4. The Management is also responsible for ensuring that the Company

complies with the requirements of the Equity Listing Agreement and for

providing all relevant information to the Securities and Exchange

Board of India.

Auditor’s Responsibility

5. Pursuant to the requirements of the Equity Listing Agreement, it is our

responsibility to obtain reasonable assurance and form an opinion as

to whether the Statement is in agreement with the [audited financial


81

statements for the year ended [and books and records]42 of the

Company]43

6. The financial statements referred to in paragraph 5 above, have been

audited by us on which we issued an unmodified audit opinion vide our

reports dated [month][date][year]. Our audits of these financial

statements were conducted in accordance with the Standards on

Auditing and other applicable authoritative pronouncements issued by

the Institute of Chartered Accountants of India. Those standards

require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material

misstatement. Our audits were not planned and performed in

connection with any transactions to identify matters that may be of

potential interest to third parties.






of India.





Opinion

9. Based on our examination as above, and the information and

explanations given to us, in our opinion, the Statement is in agreement

with the audited financial statements for the year ended of the

Company and fairly presents, in all material respects, the manner of

42 Strike off, if not applicable 43 If the audited financial statements of the entity are not available, it may not be

possible for the practitioner to provide reasonable assurance on the utilization of

funds by the entity. However, in case the practitioner is required to issue a report,

the practitioner should consider providing a limited assurance report. Reference

should be made to paragraph 80 of this Guidance Note, which specifies the

requirements to be complied with by the while preparing an assurance report that

expresses a limited assurance.


82

the utilization of funds including funds utilized for purposes other than

those stated in the offer document.

Restriction on Use

10. This report is addressed to and provided to the Board of Directors of

the Company solely for the purpose of enabling it to comply with its

obligations under the Equity Listing Agreement to submit the

accompanying Statement to the Audit Committee accompanied by a

report thereon from the statutory auditors and should not be used by

any other person or for any other purpose. Accordingly, we do not

accept or assume any liability or any duty of care for any other

purpose or to any other person to whom this report is shown or into

whose hands it may come without our prior consent in writing.



(Designation44)

Membership Number

Place of Signature

Date



83

Illustration 4: Practitioner’s Report on Statement of Fixed Assets for the

Last Two Years in Respect of One of the Project of an Entity


Independent Practitioner’s Report on Statement of Fixed Assets

1. This report is issued in accordance with the terms of our agreement

dated [date].

2. The accompanying Schedule of Fixed Assets as at [date] and [date]

has been prepared by M/s xxx (the “Company”) in respect of its project

at [ABC] (the “Statement”), pursuant to the requirement of ‘Annexure

B’ of the application filed by the Company with the …………………….

(specify the name of the relevant authority) for availing Fixed Capital

Investment Subsidy relating to the new plant commissioned at

xxx. We have initialled the Statement for identification purposes only.

Management’s Responsibility

3. The accompanying Statement, including the creation and maintenance

of all accounting and other records supporting its contents, is solely

the responsibility of the Management of the Company. The Company’s

Management is responsible for the designing, implementing and

maintaining internal control relevant to the preparation and

presentation of the Statement, and applying an appropriate basis of

preparation; and making estimates that are reasonable in the

circumstances.

4. The Company’s Management is also responsible for ensuring that the

Company complies with the requirements of the Scheme and for

providing all relevant information to the …………………… (name of the

authority).


5. It is our responsibility to report on the Statement based on our

examination of the matters in the Statement with reference to the

books of account and other records of the Company for the years

ended [dates], which have been subjected to audit pursuant to the

requirements of the Companies Act, 2013.


84

6. The financial statements for the financial years ended [dates], have

been audited by us on which we issued an unmodified audit opinion

vide our reports dated [month][date][year]. Our audits of these financial

statements were conducted in accordance with the Standards on

Auditing and other applicable authoritative pronouncements issued by

the Institute of Chartered Accountants of India. Those standards

require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material

misstatement. Our audits were not planned and performed in

connection with any transactions to identify matters that may be of

potential interest to third parties.






of India.





Opinion

9. Based on our examination, as above, and the information and

explanations given to us, we report that the Statement is in agreement

with the books of account and other records of the Company as

produced to us for our examination.

Restriction on Use

10. This report has been issued at the request of the Board of Directors of

the Company, for submission to ……………………………….. (name of

the authority) pursuant to the requirements of the Scheme. Our report

should not to be used for any other purpose or by any person other

than the addressees of this report. Accordingly, we do not accept or

assume any liability or duty of care for any other purpose or to any

other person to whom this report is shown or into whose hands it may


85

come save where expressly agreed by our prior consent in

writing.



(Designation45)

Membership Number

Place of Signature

Date


86

6. Guidance Note on Audit of Expenses

GUIDANCE NOTE ON AUDIT OF EXPENSES

Contents Paragraph(s)

Introduction .................................................................................... 1-5

Internal Control Evaluation ................................................................ 6

Verification .................................................................................... 7-41

Goods and Raw Materials Consumed ......................................... 11

Purchases and Purchase Returns .......................................... 12-21

Wages and Salaries .............................................................. 22-27

Bonus ........................................................................................ 28

Retirement Benefits .................................................................... 29

Other Conversion Costs ............................................................. 30

Establishment and General Administrative Expenses .................. 31

Interest and Financial charges .................................................... 32

Depreciation ............................................................................... 33

Research and Development Expenses ................................... 34-35

Repairs and Maintenance ........................................................... 36

Contingencies ............................................................................ 37

Taxes on Income ................................................................... 38-41

Special Considerations in the Case of a Company ......................... 42

Examination of Presentation and Disclosure .................................. 43

Management Representation ........................................................... 44

Documentation ................................................................................. 45

Published in November, 2001 issue of ‘The Chartered Accountant’.


87

Para 2.1 of the "Preface to the Statements on Standard Auditing Practices"1

issued by the Institute of Chartered Accountants of India states that the

"main function of the APC is to review the existing auditing practices in India

and to develop Statements on Standard Auditing Practices (SAPs)** so that

these may be issued by the Council of the Institute." Para 2.4 of the Preface

states that the "APC will issue Guidance Notes on the issues arising from the

SAPs wherever necessary."

The Auditing Practices Committee*** has also taken up the task of reviewing

the Statements on auditing matters issued prior to the formation of the

Committee. It is intended to issue, in due course of time, SAPs or Guidance

Notes, as appropriate, on the matters covered by such Statements which

would then stand withdrawn. Accordingly, with the issuance of this Guidance

Note on Audit of Expenses, paragraphs 11.2-11.8 of Chapter 11 of the

Statement on Auditing Practices, titled `Profit and Loss Account', shall stand

withdrawn. In due course of time, the entire Statement on Auditing Practices

shall be withdrawn.2

The following is the text of the Guidance Note on "Audit of Expenses" issued

by the Auditing Practices Committee of the Council of the Institute of

Chartered Accountants of India. This Guidance Note should be read in

conjunction with the Statements on Standard Auditing Practices issued by

the Institute.

Introduction

1. An expense is a cost relating to the operations of an accounting period

or to the revenue earned during the period or the benefits of which do

not extend beyond that period. The expression "cost" means the

amount of expenditure incurred on or attributable to a specified article,

product or activity.

1 The said Preface has been withdrawn pursuant to issuance of the Revised

“Preface to Standards on Quality Control, Auditing, Review, Other Assurance and

Related Service”, by the Institute of Chartered Accountants of India. The Revised

Preface is effective from April 1, 2008. The text of the revised Preface is reproduced

in the Vol-I.A of this Handbook.

** Now known as Engagement Standards.

*** Now known as Auditing and Assurance Standards Board. 2 Since the Statement was withdrawn in March, 2005, the entire paragraph is

redundant.


88

2. Expenses are recognised by the following approaches:

(a) Identification with revenue transactions

Costs directly associated with the revenue recognised during

the relevant period are considered as expenses and are

charged to income for the period.

(b) Identification with a period of time

In many cases, although some costs may have connection with

the revenue for the period, the relationship is so indirect that it

is impracticable to attempt to establish it. However, there is a

clear identification with a period of time.3 Such costs are

regarded as `period costs' and are expensed in the relevant

period, e.g, salaries, telephone, travelling, depreciation on office

building, normal interest, etc. Similarly, the costs, the benefits of

which, do not clearly extend beyond the accounting period are

also charged as expenses.

3. The following features of expenses affect the nature, timing and extent

of the related audit procedures:

(a) In the case of most items of expenses, documentary evidence

originating from third parties is available.

(b) The nature and relative significance of various items of

expenses usually differ from one enterprise to another,

depending primarily on the nature of operations carried out by

them. For example, in the case of most manufacturing

enterprises, the principal items of expenses would include the

cost of raw materials consumed, labour cost and other

conversion costs. On the other hand, in the case of a trading

enterprise, the principal items of expenses would generally be

the cost of goods sold. In the case of an enterprise supplying,

providing, maintaining and operating any services, the principal

items of expense would include personnel and professional

expenses, office maintenance, etc.

3 Reference may be made in this regard to the Guidance Note on Accrual Basis of

Accounting.


89

(c) The amount of some expenses has a logical relationship with

certain other financial statement items while the amount of

some other expenses does not have such a relationship. For

example, in an enterprise where the production process is

standardised, the consumption of raw materials (and, therefore,

the cost of raw materials consumed) has a logical relationship

with the quantum of output. Similarly, the proportion of various

constituents of cost of production is expected to remain more or

less constant in the absence of known conditions to the

contrary. Likewise, proportion of the amount of interest for a

period to the amount of loans outstanding during the period is

expected to vary within certain specific limits. On the other

hand, the expenditure on research and development often has

little relationship with other items in the financial statements.

(d) The amount of some items of expenses (e.g., gratuity, taxes,

bonus, etc.) is significantly affected by applicable laws.

4. In an audit, the auditor employs appropriate procedures to obtain

reasonable assurance about various assertions (see SA 500, Audit

Evidence). In carrying out an audit of expenses, the auditor is

particularly concerned with obtaining sufficient appropriate audit

evidence to corroborate the management's assertions regarding the

following:

Occurrence that recorded expenses arose from transactions or

events which took place during the relevant period and

pertain to the entity.

Completeness that there are no unrecorded expenses.

Measurement that expenses are recorded in the proper amounts and

are allocated to the proper period.

Presentation and Disclosure that expenses are disclosed,

classified, and described in accordance with

recognised accounting policies and practices and

relevant statutory requirements, if any.

5. In view of the divergence in the nature of expenses incurred by

different enterprises, it is not possible to describe the audit procedures

applicable in carrying out an audit of expenses in all situations. This


90

Guidance Note provides guidance on procedures to be employed in

carrying out an audit of expenses which would be applicable in the

case of most enterprises. It is recognised, however, that audit

procedures different from or additional to those described in this

Guidance Note may be necessary in a particular case, depending

upon its specific facts and circumstances.

Internal Control Evaluation

6. The auditor should study and evaluate the system of internal control

relating to expenses, to determine the nature, timing and extent of his

other audit procedures. He should particularly review the following

aspects of internal control relating to expenses:4

(a) The systems and procedures relating to incurring of expenses

including authorisation procedures.

(b) Accounting procedures relating to recognition of expenses.

(c) Existence of periodic reports on actual performance vis a vis

budgets and internal management reports, if any.

Verification

7. Verification of expenses may be carried out by employing the

procedures, viz., (a) examination of records; and (b) analytical

procedures. The nature, timing and extent of substantive procedures

to be performed is, however, a matter of professional judgment of the

auditor which is based, inter alia, on the auditor's evaluation of the

effectiveness of the related internal controls. The auditor should

examine whether the basis of recognition of expenses by the entity is

in accordance with the recognised accounting principles.

(a) Examination of Records

8. Examination of records and documents is one of the most important

techniques of auditing. An auditor has to examine a large number of

documents in the course of an audit since most transactions are

4 The extent of review of internal controls would depend upon the facts and

circumstances of each case. Reference may be made in this regard to the "Internal

Control Questionnaire", issued by the Institute of Chartered Accountants of India in

1976 which contains, inter alia, an illustrative list of internal controls in relation to

petty cash, cash and bank payments, salaries and wages and purchases.


91

supported only by documentary evidence. The accounting systems of

business enterprises are so designed that documentary evidence is

created in respect of each transaction. The auditor should carry out an

examination of the relevant records to satisfy himself about the

validity, accuracy and other assertions with regard to various

expenses incurred by the entity. The extent of such examination would

depend on the auditor’s evaluation of the efficacy of internal controls.

(b) Analytical Procedures

9. The auditor should conduct analytical procedures which involve

analysis of significant ratios and trends, including the resulting

investigation of fluctuations and relationships that are inconsistent with

other relevant information or which deviate from predicted amounts.5

10. The following paragraphs describe the audit procedures applicable in

respect of various items of expenses.

Goods and Raw Materials Consumed

11. The auditor's examination of the cost of goods, stores and materials

consumed during the year would involve, inter alia, examination of

purchases of goods and materials made during the year as well as of

purchase returns and of opening and closing inventories.

Purchases and Purchase Returns

12. The auditor should examine whether the entity has instituted adequate

cut-off procedures in relation to purchases and purchase returns. The

objective of cut-off procedures is to ensure that the transactions

pertaining to a period are recorded in that period and not in a

preceding or subsequent period. The auditor should examine the

efficacy of such procedures. The auditor can examine the selected

receipt documents (such as goods received notes) pertaining to a few

days immediately before the year-end and verify that the related

purchase invoices have been recorded as purchases of the current

year. The auditor should pay particular attention to the cut-off

procedures relating to purchases, both indigenous and imported, to

determine whether these procedures ensure recognition of purchases

at the time the significant risks and rewards of ownership of the related

goods pass on to the entity.

5 Refer to Standard on Auditing (SA) 520, “Analytical Procedures”.


92

13. The auditor should examine selected entries in the purchase journal

with reference to the related purchase invoices, receipt records and

other supporting documents such as the purchase orders. The auditor

should also trace the selected entries to the suppliers' account.

14. While examining purchase invoices, the auditor should examine

whether subsidies, rebates, duty drawbacks or other similar items

have been properly accounted for. As per AS 2, costs of purchase

consist of the purchase price including duties and taxes (other than

those subsequently recoverable by the enterprise from the taxing

authorities), freight inwards and other expenditure directly attributable

to the acquisition. Trade discounts, rebates, duty drawbacks and other

similar items are deducted in determining the costs of purchase.

15. The auditor should also examine selected receipt records with

reference to related purchase invoices and the purchase journal.

16. The auditor should examine selected entries of purchase returns with

reference to the goods returned notes, debit notes and entries in the

suppliers' accounts. Similarly, the auditor should examine selected

debit notes with reference to purchase returns, goods returned notes,

and entries in the suppliers' accounts.

17. In case of transactions between related parties, the auditor should pay

special attention to nature and description of such transactions.6

18. The auditor should obtain a representation from the management to

the effect that the entity has complied with the legal and regulatory

requirements, if any. When the auditor becomes aware of non-

compliance, the auditor should obtain sufficient information to evaluate

the possible effect in the financial statements. The auditor should also

consider communication/reporting of non-compliance with the

management including audit committee, users of financial statements

and to regulatory authorities, as may be appropriate.7

19. In respect of imports, the auditor should carry out the following

procedures in addition to the usual audit procedures applicable in

respect of domestic purchases.

6 Refer to Accounting Standard (AS) 18, “Related Party Disclosures”. 7 Refer to Standard on Auditing (SA) 250, “Consideration of Laws and Regulations in

an Audit of Financial Statements”.


93

(a) Besides examining the usual documents relating to purchases,

the auditor should also examine such documents as bill of

lading, custom documents, etc., which are specific to import

transactions.

(b) The auditor should pay special attention to the terms of import

relating to the incidence of charges like insurance and freight,

i.e., whether the imports are on C.I.F. basis, or F.O.B. basis, or

some other basis.

(c) The auditor should examine that imports for which consideration

is payable in a foreign currency are recorded at an appropriate

amount in accordance with Accounting Standard (AS) 11,

Accounting for the Effects of Changes in Foreign Exchange

Rates.

20. In addition to the audit procedures discussed above, the following

analytical procedures may often be helpful as a means of obtaining

audit evidence regarding the various assertions relating to purchases.

(a) Comparison, item-wise and location-wise, both quantity and

value, of purchases for the current year/period with the

corresponding figures for previous years/periods.

(b) Comparison of ratio of gross margin to sales for the current

year/period with the corresponding figures for previous

years/periods.

(c) Comparison of ratio of purchase returns to purchases for the

current year/period with the corresponding figures for previous

years/periods.

(d) Product-wise reconciliation of quantity sold during the

year/period with opening stock, purchases/production and

closing stock.

Apart from the above, the auditor may also work out quantitative ratios

and reconciliations, e.g., he may relate the quantum of output to the

quantum of input to judge its reasonableness. In case segment

information is available, the above procedures may be carried out for

each segment.

21. The auditor should also verify payments subsequent to the date of the


94

balance sheet to identify any purchases which have not been recorded

in the books of account.

Wages and Salaries

22. The auditor should examine the entries in the payroll/wage sheets with

reference to relevant records, e.g., employee’s records maintained by

the personnel department showing details of pay such as basic pay,

allowances, annual increments, leaves availed, etc. Special attention

may also be paid by auditor in respect of new employees joining the

entity during the year. Similarly, the payroll may also be examined with

reference to the time records/attendance records and leave records

maintained by the personnel department. The deductions made in

respect of income-tax, provident fund, Employees’ State Insurance

(ESI), welfare schemes, health schemes, etc., may be examined with

reference to the returns submitted to the authorities concerned and the

receipts/acknowledgments issued by such authorities.

23. The auditor should examine whether any legal, regulatory or

contractual requirements having a bearing on the rate or amount of

wages and salaries have been complied with. Similar considerations

would also apply to payments made to a contractor for hire of labour.

Such requirements would include, inter alia, the provisions of the

Minimum Wages Act, 1948, agreement with the employees, award of

competent authority and judicial rulings.

24. In the case of senior management officials, the auditor should pay

particular attention to determining whether the salaries payable are as

per the terms of contract with the employees concerned. Special

requirements of terms of contract such as granting stock options (as

per schemes formulated by SEBI), availing leave encashment, total

amount payable annually including ex-gratia, etc., should be

specifically looked into.

25. In the case of casual labour, besides carrying out the other audit

procedures, the auditor should specifically examine the sanction of the

competent authority for employment of such labour and ascertain

whether such employees are retained as per the time rate or piece-

rate basis. In appropriate cases, the auditor may pay a surprise visit to

the sites where the casual labour is employed to assess the

correctness of the attendance records maintained in respect of such


95

labour. In cases where complete outsourcing of labour has been given

to an outside agency, the terms of agreement and compliance thereof

would be examined.

26. The auditor should obtain a list of employees who have retired or

otherwise left the services of the entity during the period under audit

and examine that they have not been included in the payroll.

27. In addition to the audit procedures discussed above, the following

analytical procedures may often be helpful as a means of obtaining

audit evidence regarding the various assertions relating to wages and

salaries:

(a) comparison of wage bill for the year/period with the wage bill of

previous years/periods;

(b) comparison of the monthly wages and salaries of a month with

other months during the year/period and with the corresponding

month of the previous years/periods;

(c) comparison of the wage bill for each department/unit for the

current year/period with the corresponding figures for previous

years/periods;

(d) comparison of the ratios of wages and salaries to sales for the

current year/period with the corresponding figures for the

previous years/periods;

(e) comparison of the ratio of wages and salaries to cost of

production for the current year/period with the corresponding

figures for previous years/periods;

(f) comparison of the ratio of contribution towards provident fund to

wages and salaries for the current year/period with the

corresponding figures for previous years/periods;

(g) comparison of the ratio of contribution towards provident fund to

wages and salaries for the current year/period with the rate(s) of

contribution specified under the law governing provident fund;

(h) comparison of the ratio of contribution towards ESI to wages

and salaries for the current year/period with the corresponding

figure for previous years/periods;


96

(i) comparison of the ratio of contribution towards ESI to wages

and salaries for the current year/period with the rate(s) of

contribution specified under the law governing the ESI.

Bonus

28. In the case of provision for bonus, the auditor should examine whether

the liability is provided for in accordance with the Payment of Bonus

Act, 1965, and/or agreement with the employees or award of

competent authority. Where the bonus actually paid is in excess of the

amount required to be paid as per the provisions of the applicable

law/agreement/award, the auditor should specifically examine the

authority for the same (e.g., resolution of the board of directors in the

case of a company).

Retirement Benefits

29. The auditor should examine whether the entity is liable to pay any

retirement benefits to its employees such as provident fund,

superannuation/pension, gratuity, etc., whether in pursuance of

requirements of any law and/or in terms of agreement with the

employees8. If so, the auditor should examine whether the amount

payable has been computed in accordance with the relevant legal

and/or contractual requirements. In respect of gratuity/pension, the

auditor should specifically examine whether the provision for accruing

gratuity/pension liability has been made by the entity. The auditor

should examine the adequacy of provision with reference to the

actuarial certificate obtained by the entity9. In case the entity has not

obtained such an actuarial certificate, the auditor should examine that

the method followed by it, say, group gratuity insurance scheme taken

by the entity, for calculating the accrued liability for gratuity is rational.

Other Conversion Costs

30. The auditor should verify the other conversion costs (such as power

and fuel, processing charges, etc.) with reference to the supporting

documents and related agreements. In case the material is sent

8 Attention is invited in this regard to Accounting Standard (AS) 15, “Employees

Benefits”. 9 Attention is also invited in this regard to Standard on Auditing (SA) 620, “Using the

Work of an Auditor’s Expert”.


97

outside to third parties for processing, necessary charges including

existence of materials, wastage, etc., need to be ascertained and

accounted for. In addition, the auditor may also compare the amount of

expense on a particular item with the corresponding figure for previous

years. Similarly, he may work out the ratios of different items of

conversion costs to total cost of production for the current year and

compare the same with the corresponding figures for previous years.

Establishment and General Administrative Expenses

31. The auditor should verify establishment expenses and general

administrative expenses such as insurance, rent, rates, conveyance,

travelling, telephone, entertainment, printing and stationery, general

expenses, etc., with reference to the sanction of the competent

authority, the supporting documents, related agreements and the rules

and regulations followed by the entity. The auditor may also compare

the amounts of these expenses with the corresponding figures for

previous years. Similarly, he may work out the ratios of different items

of expenses to sales for the current year and compare the same with

the corresponding figures for previous years.

Interest and Financial charges

32. The auditor should verify the amount of interest expense for the year

with reference to the terms and conditions of relevant agreements. The

auditor may also work out the ratio of interest expense for the year to

average interest-bearing loans and advances outstanding during the

year and compare it with the corresponding figure for previous years

and reconcile the same. The auditor should particularly examine that

interest as well as other financing costs such as commitment fees on

funds borrowed for a qualifying asset included in the gross book value

of the asset to which they relate and have not been charged to the

Profit and Loss Account of the period in which they are incurred10. If

the entity has paid any penal interest, it should also be examined.

Such interest should be disclosed as part of normal interest. The

auditor should onsider, having regard to the materiality, whether it

requires separate disclosure.

10 Attention is invited in this regard to Accounting Standard (AS) 16, “Borrowing

Costs”.


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Depreciation

33. The auditor should check the calculation of depreciation. The total

depreciation arrived at should be compared with that of previous years

to identify reasons for variations. The auditor should particularly

examine whether the depreciation charge having regard to rate of

depreciation and method of depreciation followed consistently is

adequate keeping in view the generally accepted bases of accounting

for depreciation11. Alternatively, the auditor may consider qualifying his

report. In case, assets have been revalued by entity during the year,

the auditor should ensure that the depreciation has been computed

properly.

Research and Development Expenses

34. The auditor should verify various items of expenses incurred on

research and development with reference to supporting documents

and related agreements. For example, the cost of materials consumed

for research and development may be verified with reference to such

documents as purchase invoices, goods received notes, records

relating to issue of materials, etc. The auditor should particularly

examine whether the accounting policy followed by the entity

regarding treatment of research and development costs is in

accordance with Accounting Standard (AS) 8, “Accounting for

Research and Development”.

35. The auditor should examine whether the deferral meets the

appropriate legal requirements, if any. If an accounting policy for

deferral of research and developments is adopted, it should be applied

to all such projects which meet the criteria laid down for deferral under

AS 8. The auditor should examine whether the criteria laid down in AS

8 which previously justified the deferral of certain research and

development costs no longer apply, the unamortised balance has been

charged as an expense of the year. Similarly, the auditor should

examine that where the criteria for deferral continue to be met but the

amount of unamortised balance of the deferred research and

development costs and other relevant costs exceed the expected

future revenues/benefits related thereto, such excess has been

charged as an expense immediately.

11 Attention is also drawn to Accounting Standard (AS) 6, “Depreciation Accounting”.


99

Repairs and Maintenance

36. The auditor should scrutinise the repairs and maintenance account to

ascertain that new fixed assets and substantial improvements to

existing assets have not been included in repairs and maintenance.

The auditor should exercise special care particularly in case large

amounts charged to the Profit and Loss Account.

Contingencies

37. In respect of product warranties, service contracts, performance

warranties, etc., the auditor should examine whether provisions have

been made in accordance with Accounting Standard (AS) 4,

“Contingencies and Events Occurring After the Balance Sheet Date”.

The auditor should also examine the reasonableness of the basis

adopted for quantifying the provision with reference to the relevant

agreements and the assessment based on his past experience.

Taxes on Income

38. The auditor should examine that tax expense or tax saving has been

properly computed and disclosed in the financial statements12. The tax

expense for the period which comprises current tax and deferred tax is

to be included in the determination of net profit or loss for the period

under audit. In case of companies attracting minimum alternate tax, it

has to be ensured that proper provision has been considered in the

accounts. The auditor should examine that the deferred taxes have

been recognized for all timing differences subject to consideration of

prudence in respect of deferred tax assets as set out in Accounting

Standard (AS) 22, Accounting for Taxes on Income. If there is a

material departure from the provisions of AS 22, the auditor should

qualify his report.

39. In respect of assessments completed, revised or rectified during the

year, the auditor should examine whether suitable adjustments have

been made in respect of additional demands or refunds, as the case

may be. The relevant orders received up to the time of audit should be

considered and, on this basis, it should be examined whether

adjustment is required in the financial statements.

12 Attention is drawn to Accounting Standard (AS) 22, “Accounting for Taxes on

Income”.


100

40. If the entity disputes its liability in regard to demands raised, the

auditor should examine whether there is a positive evidence or action

on the part of the entity to show that it has not accepted the demand

for payment of tax or duty, e.g., where it has gone into appeal under

relevant provisions of the Income-tax Act, 1961. Where an application

for rectification of mistake has been made by the entity, the amount

should be regarded as disputed. Where the demand notice/intimation

for the payment of tax is for a certain amount and the dispute relates

to only a part and not the whole of the amount, only such amount

should be treated as disputed. A disputed tax liability may require a

provision or suitable disclosure (see Accounting Standard 4,

Contingencies and Events Occurring after the Balance Sheet Date). In

determining whether a provision is required, the auditor should, among

other procedures, make appropriate inquiries of management, review

minutes of the meetings of the board of directors and correspondence

with the entity's lawyers, and obtain appropriate management

representations.

41. The auditor should obtain from the management, a statement showing

the status of pending tax matters. He should examine the statements

to assess the adequacy of provisions made in respect of those matters

in the context of their current status.

Special Considerations in the Case of a Company

42. In the case of audit of a company, in addition to the procedures

described above, the auditor should also carry out appropriate audit

procedures in respect of matters which are specifically required to be

examined under the provisions of the Companies Act, 1956. Some of

the illustrative procedures specifically applicable in the case of audit of

a company are described below. It may be clarified that the following is

not an exhaustive list of additional procedures to be carried out in the

case of audit of expenses in the case of a company.

(a) The auditor should examine whether the managerial

remuneration paid or payable by the company is within the limits

laid own under section 198 and Schedule XIII to the Companies

Act, 1956. The auditor should also examine whether the

remuneration paid or payable to the directors of the company,

including any managing or whole-time director, has been


101

determined by the Articles of Association of the company or by

a resolution of the company passed in a general meeting. The

auditor should also examine whether the remuneration of

directors complies with the provisions of section 309 of the

Companies Act, 1956. The auditor should further examine

whether the computation of net profit for purposes of managerial

remuneration is in accordance with sections 349 and 350 of the

Companies Act, 1956.

(b) The auditor should examine whether the contributions, if any,

made by the company to charitable and other funds not directly

relating to the business of the company or the welfare of its

employees comply with the provisions of section 293 of the

Companies Act, 1956. According to this section, the board of

directors of a public company cannot, except with the consent of

the company in general meeting, contribute to charitable and

other funds not directly relating to the business of the company

or the welfare of its employees, any amounts the aggregate of

which will, in any financial year, exceed Rs.50,000 or 5 per cent

of the average net profits of the company as determined in

accordance with the provisions of section 349 and section 350

during the three financial years immediately preceding,

whichever is greater. The auditor should examine whether the

Memorandum of Association of the company empowers it to

make contributions to charitable or other funds not directly

relating to the business of the company or the welfare of its

employees. If the objects clause in the Memorandum does not

contain such authority, the company has no power to make such

contributions.

The auditor should ask the management to prepare a schedule

of contributions to various funds covered by section 293 made

during the year, giving the names of the institutions to which

contributions have been made, the amounts paid and the dates

on which the contributions were approved by the board of

directors. He should also ask the management to prepare a

computation showing the limits of permissible contributions

which can be made under this section.

(c) The auditor should examine whether political contributions made


102

by the company are within the limit prescribed in section 293A

of the Companies Act, 1956.13 where the limit laid down under

section 293A is adhered to and the facts are properly disclosed,

the auditor has no further duty. Where, however, the facts

regarding such contributions are not properly disclosed, the

auditor should qualify his report and state the facts therein.

Where the auditor has genuine doubt regarding the applicability

of the Section, he should ensure that the fact is properly

disclosed in his audit report.

Where the auditor is satisfied that political contributions have

been made in excess of the limit prescribed in section 293A, he

should bring this to the attention of the shareholders by

qualifying his audit report and making a mention of the excess

amount involved, if ascertainable.

The auditor should obtain a certificate from company's board of

directors to the effect that all amounts of contributions to

political parties or for any political purpose to any person falling

under the provisions of section 293A have been brought into the

books of account of the company and that no amounts of such

nature other than those so included in the books have been

paid/given, directly or indirectly.

(d) The auditor should examine whether the contribution, if any, to

the National Defence Fund or any other fund approved by the

Central Government for the purpose of national defence

complies with the provisions of section 293B of the Companies

Act, 1956. This section empowers the board of directors to

make such contributions. It may be noted that unlike the

contributions to charitable or other funds not directly relating to

the business of the company or to the welfare of its employees,

contributions to National Defence Fund (or other similar funds)

can be made by a company even where the Memorandum of

Association of the company does not specifically empower it in

this regard. The auditor should examine whether the total

amount or amounts contributed by the company to the National

13 Reference may be made in this regard to the Guidance Note on Section 293A of

the Companies Act and the Auditor.


103

Defence Fund (or other similar funds) during the year have been

suitably disclosed in the profit and loss account.

(e) In respect of payments to sole-selling agents, the auditor should

examine whether the provisions of sections 294, 294A and

294AA have been complied with.

(f) The auditor should examine whether the provisions of section

297 have been complied with in appropriate cases. He should

also examine compliance with the terms and conditions, if any,

stipulated by the Central Government in its approval under the

proviso to sub-section (1) of section 297.

(g) In case any partner or relative of a director of the company, any

firm in which such director, or relative of such director, is a

partner, any private company of which such director is a director

or member, or any director, or manager of such a private

company, holds any office or place of profit under the company

or under any subsidiary of the company, the auditor should

examine whether the provisions of section 314 have been

complied with.

(h) The auditor should examine whether any personal expenses

have been charged to revenue account.

(i) The auditor should examine whether the transaction of purchase

of goods and materials and services, made in pursuance of

contracts or arrangements entered in the register(s) maintained

under section 301 of the Companies Act, 1956, as aggregating

during the year to Rs. 50,000@ (Rupees Fifty Thousand) or

more in respect of each party, have been made at prices which

are reasonable having regard to prevailing market prices for

such goods, materials and services or the prices at which

transaction for similar goods or service have been made with

other parties.

(j) The auditor should examine whether any undisputed amounts

payable in respect of income tax, wealth tax, sales tax, customs

@ This limit has been enhanced to Rs. five lacs by the Companies (Auditor’s Report)

Order, 2003. 14 Reference may be made in this regard to Statement on the

Companies (Auditor's Report) Order, 2003 (Revised in 2005).


104

duty and excise duty were outstanding as at the last day of

financial year concerned, for a period of more than six months

from the date they became payable have been reported under

MAOCARO, 1988@@.

Examination of Presentation and Disclosure

43. The auditor should satisfy himself that the expenses have been

properly classified and disclosed in the financial statements. Where

the relevant statute lays down any disclosure requirements in this

behalf, the auditor should examine whether the same have been

complied with.

Management Representation

44. The auditor should consider obtaining a management representation

on expenses charged to the statement of profit or loss when other

sufficient appropriate audit evidence cannot reasonably be expected to

exist.14

Documentation

45. The auditor should maintain adequate working papers regarding audit

of expenses.15

@@ Replaced by the Companies (Auditor’s Report) Order, 2003. 14 Reference may be made in this regard to Standard on Auditing (SA) 580, “Written

Representations”. 15 Reference may be made in this regard to Standard on Auditing (SA) 230, “Audit

Documentation”

105

7. Relevant portion related to CSR being Clause xx in Guidance Note on CARO 2020 issued by ICAI.

83. Whether, in respect of other than ongoing projects, the company

has transferred unspent amount to a Fund specified in Schedule VII to

the Companies Act within a period of six months of the expiry of the

financial year in compliance with second proviso to sub-section (5) of

section 135 of the said Act; [Paragraph 3(xx)(a)]

Relevant Provisions

(a) This clause requires the auditor to comment whether the company has

transferred the unspent amount, in respect of “other than ongoing

projects”, to a fund specified in Schedule VII to the Companies Act

2013 within a period of six months of the expiry of the financial year in

compliance with the second proviso to sub-section (5) of section 135

of the said Act.

(b) Section 135 of the Companies Act, 2013 requires, inter alia, as under

(i) Every company having net worth of rupees five hundred crore or more,

or turnover of rupees one thousand crore or more or a net profit of

rupees five crore or more during the immediately preceding financial

year shall constitute a Corporate Social Responsibility Committee of

the Board.

(ii) The Corporate Social Responsibility Committee shall,

(a) formulate and recommend to the Board, a Corporate Social

Responsibility Policy which shall indicate the activities to be

undertaken by the company in areas or subject, specified in Schedule

VII;

(b) recommend the amount of expenditure to be incurred on the activities

referred to in clause (a); and

(c) Monitor the Corporate Social Responsibility Policy of the company

from time to time.

(iii) The Board of every company referred to in sub-section

(1) of section 135 of the Act, shall ensure that the company spends, in


106

every financial year, at least two per cent of the average net profits of

the company made during the three immediately preceding financial

years or where the company has not completed the period of three

financial years since its incorporation, during such immediately

preceding financial years, in pursuance of its Corporate Social

Responsibility Policy.

(iv) Explanation to the sub-section (5) of Section 135, states that for the

purposes of section 135 "net profit" shall not include such sums as

may be prescribed, and shall be calculated in accordance with the

provisions of Section 198 of the Act.

(v) The second proviso to sub-section (5) of Section 135 requires that if

the company fails to spend such amount, the Board shall, in its report

made under clause (o) of sub-section (3) of section 134, specify the

reasons for not spending the amount and, unless the unspent amount

relates to any ongoing project referred to in sub-section (6), transfer

such unspent amount to a Fund specified in Schedule VII, within a

period of six months of the expiry of the financial year.

(c) Schedule VII to the Companies Act 2013 lists the activities which may

be included by companies in their Corporate Social Responsibility

Policies. Schedule VII also lists the funds to which company can

contribute which shall be recognized as Corporate Social

Responsibility spending.

Audit Procedures and Reporting

(d) The auditor needs to evaluate the applicability of section 135 to the

company.

(e) The auditor needs to obtain:

(i) Board approval of Corporate Social Responsibility Policy as

recommended by Corporate Social Responsibility Committee.

(ii) Agenda and minutes of meetings of Corporate Social

Responsibility Committee.

(iii) The workings of the amount required to be spent under section

135 of the Act detailing the calculations of the average net

profits as calculated in accordance with the provisions of section

198 of the Act and evaluate if the total amount required to be


107

spent by the company has been appropriately determined at two

percent of such average net profits.

(f) The auditor is required to obtain confirmation from the management

and review whether the Corporate Social Responsibility activities

undertaken by the company are in accordance with the Schedule VII to

the Act.

(g) The auditor should obtain from the management, details of the amount

spent, in respect of projects other than ongoing projects. In respect of

amounts spent on ongoing projects, the auditor should perform the

procedures given in clause 3(xx) (b).

(h) If the Board of a company decides to undertake its Corporate Social

Responsibility activities through a company established under section

8 of the Act or a registered trust or a registered society, other than

those specified in sub-rule 2(b) of Rule 4 of the Companies (Corporate

Social Responsibility Policy) Rules, 2014, the auditor shall verify

whether conditions stipulated in the said rules are satisfied including

the modalities of utilisation of funds of such projects and programs and

the monitoring and reporting mechanism of the same.

(i) In respect of the amounts spent on other than ongoing projects, the

auditor should examine the supporting documents such as expenditure

receipts, bank statements etc. to verify the quantum of such

expenditure. The auditor should also verify if the amount spent is in

accordance with the Corporate Social Responsibility Policy of the

company and in accordance with the provisions of the Act and the

rules made thereunder.

(j) On the basis of verification of the amounts, the auditor should further

verify that any unspent amount, in respect of other than ongoing

projects, has been transferred to a Fund specified in Schedule VII to

the Act within a period of six months of the expiry of the financial year.

The auditor should obtain supporting documents such as receipts,

payment challans, and bank statements to obtain evidence that the

amounts have been appropriately transferred to a fund specified in

Schedule VII to the Act.

(k) The auditor shall check whether the company has recorded a provision

as at the balance sheet date, to the extent considered necessary in

accordance with the provisions of AS 29/ Ind AS 37, Provisions,


108

Contingent Liabilities and Contingent Assets, in respect of the unspent

amount.

(l) In addition to the procedures given above, the auditor should also

consider the provisions of the Companies (Corporate Social

Responsibility Policy) Rules, 2014 while reporting on the unspent

amounts under this clause.

(m) The auditor may refer to the guidance given in the Guidance Note on

Accounting for Expenditure on Corporate Social Responsibility

Activities issued by the Institute of Chartered Accountants of India until

the amendments made under section 135 of the Companies Act, 2013

are notified.

(n) The auditor may also consider obtaining a representation from the

management regarding compliance of requirements of section 135.

(o) In case the company has not transferred the unspent amount, in

respect of other than ongoing projects, to a fund specified in Schedule

VII to the Act within the time limits, the auditor should ascertain the

following details as a part of his working papers for reporting under

this clause:

Rele-

vant

Finan-

cial

year*

Amount

identified

for

spending

on

Corporate

Social

Respon-

sibility

activities

“other than

Ongoing

Projects”

Un-

spent

amount

of (b)

Amount

Trans-

ferred to

Fund

specified

in

Schedule

VII to the

Act

Due

date of

transfer

to the

specifi-

ed fund

Actual

date of

transfer

to the

specifi-

ed fund

Number

of days

of delay

if any

(a) (b) (c) (d) (e) (f) (g)

(*For Current year and for the previous year/(s) for which the

amount remains unspent)


109

(p) The auditor shall report Compliance with the clause as follows:

“In respect of other than ongoing projects, the company has

transferred unspent amount to a Fund specified in Schedule VII to the

Companies Act,2013 within a period of six months of the expiry of the

financial year in compliance with second proviso to sub-section (5) of

section 135 of the said Act, except in respect of the following:

Financial year* Amount

unspent on

CSR activities

“other than On

going Projects”

Amount

Transferred to

Fund specified in

sch vii within 6

months from the

end of the

financial year.

Amount

transferred after

the due date

(specify the date

of deposit)

(a) (b) (c ) (d)



The auditor should also report under this clause the non- compliance,

if any, in respect of earlier financial year(s), in the format given above.

(q) In situations where the time period specified under the second proviso

to sub-section (5) of section 135 has not yet elapsed at the time of the

issue of the auditor’s report, the auditor should report under this

clause on the basis of the information till the date of the auditor’s

report. In such circumstances the auditor should appropriately bring

out this fact while reporting under this clause and the auditor may

make the following comment

“The company has not transferred the amount remaining unspent in

respect of other than ongoing projects, to a Fund specified in Schedule

VII to the Companies Act, 2013 till the date of our report. However, the

time period for such transfer i.e. six months of the expiry of the

financial year as permitted under the second proviso to sub-section (5)

of section 135 of the Act, has not elapsed till the date of our report.

(r) It may be noted that the amendments to section 135 of the Act through

The Companies (Amendment) Act, 2019 are yet to be notified and until


110

such time of notification of the effective date, the auditor may make the

following comment under this clause:

“The amendments to section 135 of the Companies Act, 2013 by

addition of the second proviso to sub-section (5), through the

introduction of The Companies (Amendment) Act, 2019 is yet to be

notified and as such provisions of this clause is not yet applicable to

the Company.”

84. Whether any amount remaining unspent under section (5) of Section

135 of Companies Act, pursuant to any ongoing project, has been

transferred to special account in compliance with provision of sub

section (6) of section 135 of the said Act; [Paragraph3(xx)(b)]

Relevant Provisions

(a) This clause requires the auditor to comment whether the company has

transferred the unspent amount in respect of any “ongoing projects”, to

a special account within a period of thirty days from the end of the

financial year in compliance with the provision of sub-section (6) of

section 135 of the Act.

(b) For detailed discussion on section 135 of the Act, please refer

guidance on clause 3(xx) (a) above.

(c) Any amount remaining unspent under sub-section (5) of section 135,

pursuant to any ongoing project, fulfilling such conditions as may be

prescribed, undertaken by a company in pursuance of its Corporate

Social Responsibility Policy, shall be transferred by the company

within a period of thirty days from the end of the financial year to a

special account to be opened by the company in that behalf for that

financial year in any scheduled bank to be called the Unspent

Corporate Social Responsibility Account, and such amount shall be

spent by the company in pursuance of its obligation towards the

Corporate Social Responsibility Policy within a period of three financial

years from the date of such transfer, failing which, the company shall

transfer the same to a Fund specified in Schedule VII, within a period

of thirty days from the date of completion of the third financial year.

Audit Procedures and Reporting

(d) The auditor needs to evaluate the applicability of section 135 to the

company.


111

(e) The auditor needs to obtain:

(i) Board approval of Corporate Social Responsibility Policy as

recommended by Corporate Social Responsibility Committee.

(ii) Agenda and minutes of meetings of Corporate Social

Responsibility Committee.

(iii) The workings of the amount required to be spent under section

135 of the Act detailing the calculations of the average net profit

as calculated in accordance with the provisions of section 198

of the Act and evaluate if the total amount required to be spent

by the company has been appropriately determined at two

percent of such average net profits.

(f) The auditor is required to obtain confirmation from the management

and review whether the Corporate Social Responsibility activities

undertaken by the company are in accordance with the Schedule VII to

the Act.

(g) The auditor shall verify the amount spent in respect of ongoing

projects with the supporting documents such as expenditure receipts,

bank statements etc.

(h) In respect of unspent amount, the auditor shall verify the bank account

to ensure whether it is earmarked for Corporate Social Responsibility

activity, opened for that respective financial year only and called as

Unspent Corporate Social Responsibility Account.

(i) Though the auditor is not required to report under this clause, the

auditor is required to verify that the amount transferred to such

specified bank account has been utilized for the Corporate Social

Responsibility activities as per Corporate Social Responsibility policy

within three years from the date of such transfer, failing which the

amount should be transferred to the fund as specified under Schedule

VII to the Act.

(j) The auditor shall check whether the company has recorded a provision

as at the balance sheet date, to the extent considered necessary in

accordance with the provisions of AS 29/ Ind AS 37, Provisions,

Contingent Liabilities and Contingent Assets, in respect of the unspent

amount on ongoing projects. The auditor should also evaluate if the

company has considered disclosure of such unspent amounts as


112

commitments in the contingent liabilities and commitments section of

the financial statements in accordance with the requirements of

Schedule III to the Act.

(k) In addition to the procedures given above, the auditor should also

consider the provisions of the Companies (Corporate Social

Responsibility Policy) Rules, 2014 while reporting on the unspent

amounts under this clause.

(l) The auditor may refer to the guidance given in the Guidance Note on

Accounting for Expenditure on Corporate Social Responsibility

Activities issued by the Institute of Chartered Accountants of India until

the amendments made under section 135 of the Companies Act, 2013

are notified.

(m) The auditor may also consider obtaining a representation from the

management regarding compliance of requirements of section 135.

(n) In case the company has not transferred the unspent amount, in

respect of ongoing projects, to a special account as specified under

section 135(6) of the Act within the time limits, the auditor should

ascertain the following details as a part of his working papers for

reporting under this clause:

Rele-

vant

Finan-

cial

year*

Amount

identified

for

spending

on

Corporate

Social

Respon-

sibility

activities

for

“Ongoing

Projects”

Unspent

amount of

(b)

Amount

Transferr-

ed to

Special

Account

u/s 135(6)

Due

date of

transfer

to the

account

Actual

date of

transfer

to the

account

Number

of days

of delay

(a) (b) (c) (d) (e) (f) (g)


113



(o) The auditor shall report compliance with this clause as follows:

In respect of ongoing projects, the company has transferred unspent

amount to a special account, within a period of thirty days from the end

of the financial year in compliance with section 135(6) of the said Act,

except in respect of the following

Financial

year*

Amount unspent

on Corporate

Social

Responsibility

activities for

“Ongoing

Projects”

Amount Transferred

to Special Account

within 30 days from

the end of the

Financial Year

Amount

Transferred after

the due date

(specify the date

of transfer)

(a) (b) (c) (d)



The auditor should also report under this clause the non- compliance,

if any, in respect of earlier financial year(s), in the format given above.

(p) In situations where the time period specified under the sub- section (6)

of section 135 has not yet elapsed at the time of the issue of the

auditor’s report, the auditor should report under this clause on the

basis of the information till the date of the auditor’s report. In such

circumstances the auditor should appropriately bring out this fact while

reporting under this clause and the auditor may make the following

comment:

“The company has not transferred the amount remaining unspent in

respect of ongoing projects, to a Special Account till the date of our

report. However, the time period for such transfer i.e. thirty days from

the end of the financial year as permitted under the sub-section (6) of

section 135 of the Act, has not elapsed till the date of our report.”

(q) It may be noted that the amendments to section 135 of the Act through

the Companies (Amendment) Act, 2019 are yet to be notified and until


114

such time of notification of the effective date, the auditor may make the

following comment under this clause:

“The amendments to section 135 of the Act, by inclusion of sub-

section (6), through the introduction of the Companies (Amendment)

Act, 2019 is yet to be notified and as such provisions of this clause are

not yet applicable to the company.”


115

THE COMPANIES (AMENDMENT) ACT, 2020

27. In section 135 of the principal Act,—

(a) in sub-section (5), after the second proviso, the following proviso shall

be inserted, namely:—

"Provided also that if the company spends an amount in excess of the

requirements provided under this sub-section, such company may set

off such excess amount against the requirement to spend under this

sub-section for such number of succeeding financial years and in such

manner, as may be prescribed.";

(b) for sub-section (7), the following sub-section shall be substituted,

namely:—

"(7) If a company is in default in complying with the provisions of sub-

section (5) or sub-section (6), the company shall be liable to a penalty

of twice the amount required to be transferred by the company to the

Fund specified in Schedule VII or the Unspent Corporate Social

Responsibility Account, as the case may be, or one crore rupees,

whichever is less, and every officer of the company who is in default

shall be liable to a penalty of one-tenth of the amount required to be

transferred by the company to such Fund specified in Schedule VII, or

the Unspent Corporate Social Responsibility Account, as the case may

be, or two lakh rupees, whichever is less.";

(c) after sub-section (8), the following sub-section shall be inserted,

namely:—

"(9) Where the amount to be spent by a company under sub-section

(5) does not exceed fifty lakh rupees, the requirement under sub-

section (1) for constitution of the Corporate Social Responsibility

Committee shall not be applicable and the functions of such

Committee provided under this section shall, in such cases, be

discharged by the Board of Directors of such company.".

Documents

Handbook on Audit of CSR Activities...In this direction, the CSR Committee of ICAI has brought out this Handbook on Audit of CSR Activities to provide detailed guidance on the auditing